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strategy and business
 / Winter 2007 / Issue 49(originally published by Booz & Company)


Best Business Books: Behavioral Theory

These narratives are the internal models of how individuals think of themselves. They emerge from stories that circulate among social groups of any size and provide information and insight into the character of individual members. Modern economic theory, for example, is based on the identity narrative of the strictly rational and self-interested actor who makes all decisions according to a logical calculus of costs and benefits. Noting, for example, that classically rational, self-interested actors in financial markets would never send a check to a stranger without receiving the goods first (and vice versa), Clippinger cites eBay as a market that should not exist under the assumptions of modern economics, but that does, nevertheless, manage to facilitate transactions totaling billions of dollars.

EBay succeeded because its seller feedback mechanism solved the dilemma implicit in unsecured transactions among unknown parties. It made possible a new identity narrative of the “trust but verify” online trader because it provided a digital measure of reputation. Every time a trade occurs on eBay, the two parties can rate their experience. The reputations of both seller and buyer are expressed with a colored star and a “feedback score.” Reputation, in this context, lubricates reciprocity, and reciprocity, say evolutionary psychologists, is how humans manage to mesh self-interest and the public good, identity and community.

Clippinger foresees a future in which we will increasingly use sophisticated digital trust mechanisms to enhance our ability to gain new knowledge of human nature. The most intriguing, and potentially useful, ideas presented in A Crowd of One are his suggestions for tools that could overcome barriers to technology-mediated collective action. These include sophisticated identity narratives, which, for example, would give individuals greater motivation to share information with one another; better reputation metrics, which would allow users to modulate levels of personal interaction (for example, I may not hesitate to send you a check based on your past transaction record, but that doesn’t mean I want you to join my carpool); and long-tail markets, in which online social connectivity enables small producers of economic and cultural goods and services to find specialist niches or dedicated customers.

The emergence of new identity narratives, reputation metrics, and long-tail markets is already bringing disruptive challenges to business. Today the frontier is e-commerce. In the future, though, the challenges will face every type of business. Clippinger also sees the possibility of designing digital institutions to create other types of wealth — for example, using online media to augment such solutions to economic and social problems as microlending and grassroots disaster response. But this will take time. Besides the technical challenges to building a simple, universal, secure identity verification system, there are the sociological challenges. Just as a critical mass of people needed to learn that they could use their credit cards online without too much risk, some means of identity verification must become popular enough for people to join carpools, buying clubs, and ad hoc disaster relief cooperatives with “strangers.”

Social Physics
John Henry Clippinger’s view of society is hardwired into human identity. Mark Buchanan, in contrast, uses a telescope to look at new research into the ways individual behaviors add up to emergent phenomena at the population level. Buchanan, a physicist, a contributor to strategy+business, a New York Times columnist/blogger, and a former Nature and New Scientist editor, argues in The Social Atom that “scientists are learning that what makes the social world so complex isn’t individual complexity, but the way in which people interact, in often surprising ways, to create patterns.” He writes, “Very simple behavior, when repeated in the interactions among many people, can be the source of exceedingly rich and surprising outcomes.”

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