Data sources, persuasion & marketing

Some years back, during a discussion at a small gathering at a friend's house - I argued that nature has a way of controlling things, and that we can't fool nature (e.g: if humans find a way to live longer/forever, something to the opposite effect will happen - reduced human fertility rates, natural calamities, resource depletion etc. - and that nature has a way to self-regulate). The quotation "we can't fool nature" drew some derision from one guy, and I was mocked about my qualifications to make the statement. To gain some credence, I attributed the quote to a British philosopher (I don't know if he did, but thought he must have at some point :)). There was a slight pause, and the person came around - and said the quote is very profound, and he is sold on the idea.

This incident happened a long time back, and it did surprise me at the time. I used to think - the strength of the argument is more important than who makes the argument, but I learnt a great deal from my experiences over time. Persuasive tactics (using our inherent biases) can easily steer us away from rational thinking, and in the process - drive us to take irrational decisions.

For example - when a well-known analyst/researcher/industry-group publishes/takes a position on a certain issue, the argument gains a lot of credibility, and the general public are easily persuaded to migrate towards the argument, and make it their own. We believed that the earth was flat and that we are the center of the universe for a long-time, and even persecuted people who said otherwise. In the end, we came to know the truth because of some seriously adventurous folks who were willing to question the authority. 

And for marketers, this piece of social psychology is of great help. Next time you have to sell a product/service, buy the most credible analyst/researcher/industry-group relevant to that product, and get their endorsement - and people will start buying.

I feel that - lot of us are victims of this practice (bought a particular argument/product because of the credibility of the source and got burnt) at some point or the other. And yet, we seem to have an innate ability to fall for the same trap again and again. 

• We all know that we need to buy the soaring internet stocks to make money during the dotcom bubble - these dotcomers are going to revolutionize the world, and make trillions of dollars (thanks to the marketing dollars spent by dotcom companies and the credibility of the market research firms like Gartner, IDC etc. - everybody believed this). The most rational of the human institutions - equity-markets - failed to check the simple facts, and in the process - lot of ordinary people lost their money.
• During this time (dotcom bubble), every telecom company knew that they need to lay fiber to meet the exponential growth in internet traffic, and they needed to move faster than their competition (CEOs at these companies are reading the same news and analyst reports that we - ordinary folks - were reading). They borrowed huge sums to create new telecom infrastructure, and went bankrupt in the process. Ten years after the bust, only a small fraction of this laid-out fiber is used.
• We all know how real-estate prices are going to hit the roof, and why we should buy a house right away in-spite of the insane prices (thanks to the persuasive real-estate industry, and the bankers). Each one of us - including the revered Alan Greenspan - with his army of economists, all his econometric-simulations - fell for this, and did very little to regulate the market. We lost trillions of dollars, and lot of ordinary people lost their life-savings, and jobs.
• We all knew how well our financial institutions are run, their risk-management experts, their ingenious ways of making money, and nobody can match these guys in brain-power (great brand-building by the financial institutions). Again, every one of us were sold on the idea including the Fed and the equity markets, and nothing was done here resulting in the recent major financial crisis - only matched by the great depression.
• We all know that the Fed-stimulus money is going to the poor citizens out there who lost their jobs (thanks to Henry Paulson), and it is so urgent that we need to write a check right away without going to Congress. Now, we know where it actually went.

In all the above cases, majority of the public believed in the data pushed out by a few, and never questioned the methodology or the sources. Even the most rational decision-makers (equity markets, Fed, CEOs) followed the crowd, and never questioned the data. The press which is supposed to conduct due-diligence to bring out the facts failed miserably. In each of the above cases, the press/analysts published articles/reviews that only exacerbated the situation.

I still remember the analyst recommendations about the impending world-transformation by dotcom companies, the huge number of newspaper articles on why real-estate market has to go up, and regulators gloating about how ingenious our financial institutions are. This could have pushed the skeptical minority to follow the gullible majority (which analyst could write negative information about the dotcoms in 1999?, or go against Greenspan and talk about impending real-estate bubble).

I feel understanding the study methodology, strength of the argument, and the incentives of the research team is as important than the data itself. Also, I feel relying too much on the credibility/branding/authority of the source is a big mistake.

Before using a piece of published data by a credible source, you should make sure

• to understand the incentives and the motivations of the data publisher
• to spend sometime understanding the study methodology & the assumptions made
• to have some skeptics on your team (in addition the yes-boss types), and let them ask questions
• factor in the variability of data when working on your plans (what-if scenario analysis).