Category: Economics

Uber Plays Psychological Tricks on its Drivers: What should you learn from that?

The New York Times has an interesting article about how ride-sharing company Uber plays psychological tricks on its drivers to manipulate them into doing things that are good for Uber, but not necessarily good for the drivers.

It’s a long article, but worth reading. Even if you don’t agree with the New York Times’ slant (that Uber is being evil), there are still enough interesting points in the article.

Here is one example of manipulation: when Uber wants more drivers in a particular area (to avoid surge pricing – so that customers get rides in that area without having to pay more), Uber’s managers send text messages to drivers encouraging them to go to that area. This doesn’t always work, so this is what the managers do:

Some local managers who were men went so far as to adopt a female persona for texting drivers, having found that the uptake was higher when they did.

“‘Laura’ would tell drivers: ‘Hey, the concert’s about to let out. You should head over there,’” said John P. Parker, a manager in Uber’s Dallas office in 2014 and 2015, referring to one of the personas. “We have an overwhelmingly male driver population.”

Uber acknowledged that it had experimented with female personas to increase engagement with drivers.

And there are many more in the article.

Here are some interesting takeaways for me:

  • If you aren’t aware of the findings of behavioral economics, how those techniques are used in gamification, how big companies are using these tricks to manipulate their customers (i.e. you), and in Uber’s case their contractors (i.e. the drivers), then you really need to read up.
  • This trend is going to increase. Everybody, from your social networks (e.g. Facebook) to your TV (e.g. Netflix) to your shop (e.g. Amazon) are trying hard to manipulate you, and it appears, soon your employer will start doing the same.
  • It appears to me that one of the most important things we need to teach our children is the ability to resist such manipulation. We teach them to avoid smoking and to drink in moderation via strong messaging. Maybe we need to do the same with apps.
  • Throughout the article, there is a mention of the fact that “Uber experimented with” some or the other (manipulation) feature. This is an extremely important aspect of modern software/app development. It is called A/B testing, and I am surprised that most people – including senior executives in the software industry are not aware of it. In the old days, if a company needed to decide whether to introduce some new feature in the software (e.g. give the driver a pop-up message indicating how close they’re to getting a bonus), and if yes, what should it’s configuration (at what percentage of completion should the driver get the pop-up message), the experienced people in the company would take a judgment call. However, modern software development prefers a more data driven approach: implement the feature, expose it to a subset of users, and compare these users’ behavior to that of others on various metrics. This helps you decide what features to implement in the software.
  • Overall, I do feel that the New York Times has taken a rather harsh anti-Uber stand in the article. I mean, the neither are the drivers babies, nor is Uber a monopoly, so it is unclear to me why Uber acting in its self-interest is so evil. However, there is a danger that if Uber continues to succeed and competitors like Lyft don’t, Uber will become a monopoly and that could be very dangerous.

The article is interesting for another reason – instead of generic photos or illustrations, the article actually has interactive simulations of the situations it is talking about (e.g. customer demand, driver availability, waiting times etc.), and you can actually modify the parameters and see their effect. I hope we see more of these kinds of intelligent interactive illustrations.

Lack of Trust in India, and how startups should deal with it

@dkhare of Lightspeed India Venture Partners has an interesting article about the problems with the Indian startup ecosystem that makes it difficult to start and grow a startup in India, title The Silent Killers of Startup Growth.

While some of it is the usual whining about the usual problems, there are parts that I liked, especially section about lack of trust across the board in India, the problems it causes, and how to deal with it:

Lack of trust is endemic in India, whether you are driving through the streets (and perhaps Delhi is an extreme example of lack of trust!) or negotiating with corporate partners. Examples include:

  • (some) people misrepresent themselves materially without any consequences (eg overselling).
  • (some) founders focus on control at the expense of value creation.
  • potential buyers have a hard time parting with payment details or paying for off-the-shelf software.
  • (some) people negotiate all the corner cases in extreme detail, to the point where the law of diminishing returns kicks in pretty strongly.
  • trust gap between regulators, law enforcement and business.
  • trust gap between promoters (aka founders) and investors and potential misalignment on timelines and strategy.
  • (some) government and companies focus on protecting themselves from the 1% of customers who are gaming the system at the expense of the 99% remaining customers.

Relationships, not contracts, govern deals. Many brands in India are created from execution reliability at scale rather than product differentiation. Brands in India are disproportionately more valuable as they represent a trusted provider of products or services – think about the enduring value of the Tata brand in multiple unrelated categories. As one consequence, I believe more startups should think about brand-building here in India relative to if they were in the US.

I think the takeaway message is important: in India, build relationships and reputation and the contracts will take care of themselves. Read the full article here

A validation of this same idea comes to me from an entirely different source. My father-in-law, Badri Baldawa, a self-made successful entrepreneur has this blog post on Trust vs Written Agreements which says pretty much the same thing.

The Theory of Democracy #1: Why Voter Apathy and Special Interest Groups are Inevitable

I recently stumbled on the Wikipedia page on Public Choice Theory and found the discussion fascinating. Basically, economists come up with models for democracy, apply economic theories (or game theory) to those models, and come up with interesting theorems to make predictions about how a democracy will evolve.

So, we end up with theorems that answers questions like this:

Why is there widespread apathy in a democracy?

Each voter is faced with a tiny probability that his vote will change the result of the elections, whereas gathering the relevant information necessary for a well-informed voting decision requires substantial time and effort. Therefore, the rational decision for each voter is to be generally ignorant of politics and perhaps even abstain from voting. Rational choice theorists claim that this explains the gross ignorance of most citizens in modern democracies as well as low voter turnout.

By the way, this is called Rational Ignorance which can be found in a number of different areas, not just elections.

How come special interests / minorities are given so much importance by the political parties?

Basically, whenever a government favors a special interest group in some way, it usually results in a sub-optimal allocation of resources. i.e. favors for special interests usually are not something that the majority in the democracy really want. So why does this happen in all democracies?

The reason is that the few people of the special interest group benefit hugely from the favor, and hence they have a huge incentive to fight hard to get that favor, whereas the cost is spread out over the whole populace and each individual is only slightly affected. Hence, there is not enough incentive for the general populace to put in a lot of effort to fight the special interest.

Here is a full example:

Although a majority of the voters want “good government”, there are many special interest groups that have strong incentives for lobbying the government to implement specific policies that would benefit them, potentially at the expense of the general public. For example, lobbying by the sugar manufacturers might result in an inefficient subsidy for the production of sugar, either direct or by protectionist measures. The costs of such inefficient policies are dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by the sugar manufacturers, who also have a strong incentive to continue the policy by further lobbying. Due to rational ignorance, the vast majority of voters will be unaware of the lobbying going on; in fact, even if voters become be aware of special-interest lobbying efforts, this will simply result in creation of policies which are even more complex, and harder for the general public to understand. And, even if the public were able to understand the policy proposals, they would find it impractical to engage in collective action in order to defend their diffuse interest. Therefore, theorists expect that numerous special interests will be able to successfully lobby for various inefficient policies.

For this and more fascinating insights on the economics of constitutional democracy, read the full wikipedia page on Public Choice