Knowing and Making

I've been a fan of the Barclays Cycle Hire scheme ("Boris bikes") since it launched, and have been using it regularly. It is quicker and cheaper than public transport, and has been getting me fitter too. I did hear of a couple of anomalies from friends and media - but if I'm honest, I thought they were probably the fault of the user and not of the system. Clearly some people were not returning the bikes to the docking stations correctly - TFL has been reminding us incessantly to make sure the green light goes on  when you take the bike back - and this was the reason for the extra charges. However, when it happens to me , then clearly it is a fault with the scheme. And in the last couple of days I've had some very annoying experiences. The first was just a bit strange. I logged onto my account and saw the following screen: I can say with complete confidence that I did not cycle in Kensington, Hyde Park or the Strand during those days. The Milroy Walk/Abbey...

A good friend sent me a link to this unintentionally hilarious article about pricing on the iPhone App Store . I burst out laughing at the writer's tone of utter outrage . App developers are charging the price the market will bear, and it is lower than his moral intuition tells him it should be? The list of "complaints" in this article is hilarious: People used to sell apps for $50/year on Windows. When they moved to the iPhone, the optimal strategy was to sell it for $10/year. Therefore they sell it for $10/year. NO, REALLY? "Not all of the people investing time and money in their products are reaping the returns they expected." NO, REALLY? Someone had to price his app not on the basis of how much work he put in, but on the basis of what people would pay for it. NO, REALLY? The top ten apps list (which is based on the number of items sold, like every other top ten list in the world) is dominated by cheap applications and not by expensive ones. NO, REALLY? As t...

There are lots of reasons why finance is different from normal markets, but I am particularly interested in why it is difficult to model economically. It's not fundamentally because "finance markets deal with money, which is essential to all other markets". On this basis, energy markets would have the same problems, as no other markets can operate without energy; equally, computer hardware or telephones. Instead, it's because finance has a special characteristic in information-theoretic terms: it creates contracts which operate on other contracts, which in turn operate on the first contract again. This is what George Soros calls reflexivity - but I will use another term: self-referential . Self-referential systems behave very differently to "normal" systems. Douglas Hofstadter has made a whole career out of analysing them. In his famous book Gödel, Escher, Bach he compares the self-referential patterns in Escher's art and Bach's music to Gödel...

Nice little iPhone application highlighted here at Consumerology . It is intended to help close the gap between action and reward which is the chief cause of procrastination. Could be a good add-on to any workflow system - I'll definitely be downloading it (as soon as I get my iPhone, which ironically suffers from a two-month gap between placing my order and getting my reward). A rather different approach to implementing behavioural economics in software is taken by my company, Inon - have a look at our CVM software , which helps you find better ways to sell more personalised services to each customer.

Ed Kless at VeraSage points out that BearingPoint has filed for Chapter 11 protection, wiping out shareholders equity. VeraSage campaigns for a switch from hourly-based to value pricing (mainly among accountants) and so Ed asks how BearingPoint could possibly have lost money on hourly contracts, unless most of its consultants were sitting around doing nothing for months on end. However, even though BearingPoint came out of KPMG, I doubt they were charging on an hourly rate for most projects. In my experience consulting and IT firms are much more likely to use fixed-price agreements than accountants. A number of such firms have made serious losses on these agreements in recent years - IT projects of course being notorious for going over budget. I would expect that this is the reason for BearingPoint's problems. While government IT projects used to be notorious for going over budget at the taxpayer's expense, they are now getting just as bad a reputation for causing losses on th...

Dennis Howlett has a great post on his ZDNet blog: A fresh model for software maintenance . He targets a number of things that vendors should do to reduce the cost and burden of software maintenance - treating customers individually, training their resellers and partners better, and helping the customers to build their own centres of excellence so they can support themselves better. The ideas are based in part on C.K. Prahalad and M.S. Krishnan's book, The New Age of Innovation: Driving Cocreated Value Through Global Networks . Looks like something I should be reading soon. This is an issue close to my heart, since it is a very sore point for many clients. Software buyers are much more likely to query the maintenance charges than the initial build costs - and yet maintenance seems to be an area where most small software companies don't make any money. Oracle seems to be an exception (Dennis quotes their 30% margins and says that much of it is from maintenance revenues), while S...

All the recent news in software has been about putting established categories of application software online. Online CRM software - salesforce.com. Online project management software - Basecamp. Online accounting software - Xero, Freshbooks, FreeAgent. Online ERP software - SAP Business One and Netsuite. Office productivity software - Google Apps. Email software - GMail. Even Photoshop has online competitors - Picnik (among others). This will continue, and I think most observers agree that desktop and client-server software in these categories will gradually be overtaken by the online/SaaS alternatives - though Microsoft Office will probably hold out longer than most. But when was the last time a genuinely new category of software became prominent? Think of the main categories of software: - CRM - ERP - Office suites (which used to be several separate categories: word processors, spreadsheets, presentation software) - Project management - Drawing and graphics - Email clients - W...

Another area of theory I have been working on in the last few weeks is pricing. It's well-known that suppliers can use price discrimination to distinguish between those customers who can or will pay more, and those who can't. Here are some (edited) notes from a forthcoming report we are publishing about the concept of structured pricing. Economic theory relies on agents trading products and services in a way that makes all of them better off. Any two people entering into a transaction should both gain from it; whatever is traded must be worth more to the buyer than the money they pay; and the money must be worth more to the seller than the object they’re selling. Any trade therefore provides higher value to both parties than they currently have – or else it will not happen. In classical economics, the price of something is regarded as a signal to tell the buyer and seller how much other people (at the margin where the supply and demand curve intersect) value it, and therefore ...

A fair bit of the economic research I do is speculative and it's gratifying when it ends up in a useful commercial output. This is one good example. The work I've done on how people evaluate prospective utility and make decisions has led to the concept of structured value modelling. This in turn allows us to consider how people influence each other's models of value. And the outcome of that is that we have created a new category of software: Client Value Management or CVM software. Traditional CRM systems are good for high-volume marketing - especially to consumers. They are not very popular amongst business-to-business services providers - for instance professional services firms. The reason being that CRM is a reductionist tool - its concept is to allow the simultaneous management of large numbers of people by making simplifying assumptions. If we assume that people fall into one of four demographic groups then we can send them messages at a cost of 4p each and hit a mill...