TOC False economies Your Turn

August 10, 2010

Caveat Emptor has never been so actual and it may be worth our while to examine its lessons.

First its language tells us something about human nature. Talented engineers as they were, from plumbing to warfare equipment, the Romans had no way to imagine our Information Age. Yet, as far as social interactions went, they already knew for a fact people take advantage of the unwary. Even when some piece of information is free, especially if this piece of information is free, whoever believes it "buys it" and should heed the Roman adage.

Second its content reveals a universal need. Unless we lack common sense, since we spend our life "buying" information, we ought to be in constant want of reassurance about its quality. These fillips speak of recommendations as the way to meet our need but the same concept goes by many other names. Whatever name it takes, a recommendation also comes under many different forms. Let us avoid losing track of the forest for the tree.

Third economists have long observed bad money, like hot potatoes, circulates faster. As a result its negative influence on people's confidence and hence on commerce and prosperity is disproportionate to its relative volume. The same can be said of bad information. The financial crisis was caused by fast talking bankers peddling loans to consumers who could not afford them and derivatives based on those loans to investors who could not value them. As Gillian Tett stresses, "the most pernicious issue hanging over the system right now is a loss of confidence" (*).

Putting these lessons together, you would think governments everywhere would fight this "corrosive loss of trust", promote sound recommendation systems, encourage honest recommenders and do whatever lies in their power to boost people's confidence in exchanging truthful information. You would think that indeed companies would rush to meet this as yet unsatisfied demand and set up innovative recommendation services. Think again.

To preserve their right to give advice void of any value, US rating agencies for instance "refus[e] to let their opinions be published in prospectuses for new issues of structured credit" (1). Now Flyoid Norris reports "the investment banks that put together mortgage securities told regulators that they should not be required to evaluate the credit quality of the mortgages they package and sell [as] they have no ability to do that" (**).

If nobody with legal access to relevant data wants to be held responsible for making recommendations, no wonder ordinary investors lose confidence in their ability to bet on the future and stop investing. If industrial goods manufacturers stopped offering warranties, wouldn't their sales suffer? There is however a bright spot for recommendation systems. Nowadays everyone is eager to recommend consumers to advertisers. Why?

The two phenomena are in fact mirror images of each other. The harder it is to recommend products for their quality, the more lucrative it is to recommend buyers for their gullibility. The saddest fact is that, while some people are born gullible, all of us can be made that way. If you learn all there is to know about me, chances are you will find how to ingratiate yourself to me despite my cautiousness. That's how confidence men operate.

Last week, I took the opportunity of a columm by John Gapper on the future of publishing to suggest publishers become consensual recommenders, i.e. mutually trusted third parties, who facilitate the matching of buyers and books. It is depressing to read John Makinson's own reactions (***).

The CEO of the Penguin Group does have a point in lauding "the charm of the physical book", although their even greater charm has not prevented illuminated manuscripts from going out of production relatively quickly as printing became cheaper. But unfortunately he sees "digital platforms [as giving] publishers access to rich consumer data for the first time, allowing them to take more informed decisions about pricing and content".

Pirating consumers' data to sell them more books declaring it all the while to be for their benefit is not what consensual recommenders are supposed to do. And if John Makinson believes Amazon, Apple and Google will freely share their plunder with the Penguin Group, he may find they have other ideas. Perhaps he puts his hope on Pearson telling the Financial Times to open to him its extensive dossiers on each of its online readers.

Making a living from honest recommendations is by all means a difficult proposition. Raiding personal data is far more rewarding and, when pressed, corporate pirates are wont to justify their spying by the public character of the Internet. We should expect no privacy there, the ultimate agora.

However, even when a company offers a service which tends to conform to my preferred alternative, the ultimate pneumatic network whose point to point mechanism is both memoryless and confidential, governments step in to forbid it for security's sake. Witness the current brouhaha about Research In Motion in the Middle East.

Miguel Helft and Vikas Bajaj give us a sobering assessment (****). R.I.M. said "[it] would not compromise the security of its system. At the same time, R.I.M. says it complies with regulatory requirements around the world." In a statement relayed by Jenna Wortham (*****), R.I.M. also said "customers of the Blackberry enterprise solution can maintain confidence in the integrity of the security architecture without fear of compromise".

I empathize with its founder, Mike Lazaridis. Business must comply with national laws and Justice ought to be able to spy on criminals. Companies on the other end are entitled to some level of discretion on how exactly they achieve what they claim in public. But if the resulting balance is some cryptic corporate collusion with governments the world over, biased against the rights of innocent individuals, this hardly promotes confidence among users nor does it encourage the free flow of information.

The financial bubble is no longer but each and every passing day inflates the data bubble. The former has left us with a confidence deficit. Wait for the latter bursting. False economies, those where everyone finds one's advantage in being economical with the truth, can only end in total ruin.

Our society is turning into a world of sorry suckers and dissembling drones, a dystopia which cleverly combines Brave New World with 1984.

Philippe Coueignoux

  • (*) ......... Trading volume are retreating in tandem with investor trust, by Gillian Tett (Financial Times) - August 6, 2010
  • (**) ....... Caveat Emptor, Continued, by Flyoid Norris (New York Times) - August 6, 2010
  • (***) ..... Do not write off book publishers just yet, by John Makinson (Financial Times) - August 3, 2010
  • (****) ... When Silence Sows Anxiety, by Miguel Helft and Vikas Bajaj (New York Times) - August 9, 2010
  • (*****) . Blackberry's Maker Resists Pressure From Mideast Governements, by Jenna Wortham (New York Times) - August 4, 2010
  • (1) see "Raters go on strike", by the Lex column in the Financial Times of July 23, 2010
August 2010
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