The Value of Hype

What is the value of new tech? The answer depends on our notion of value itself. Neoclassical economic theory relies on the assumption that the forces of supply and demand lead to market equilibrium, thereby leading to an optimal price that represents societal value.[1] Yet this traditional understanding has been fiercely criticized for conflating price with value. Mazzucato demonstrates that while externalities may render a product’s net social utility negative, the market price of emerging technologies is frequently astronomical, as the products themselves appear decoupled from any underlying social value. Perhaps newness – the novelty and gadgetry of tech — explains its inflated price more than the notion of value.

In emerging technologies, the inflationary power of myth-making around the tech industry appears to exercise huge influence over investment infrastructure and the economic valuation of products. [2] If there is one lesson to be gleaned from the $9 billion Theranos scandal, it is that over the past two decades, tech companies have been remarkably skilled at securing unfettered access to venture capital, frequently by pitching products with little marginal value to consumers. [3] Worse yet, tech moguls seem keen to rebrand public goods with fancy names in order to gain private profit from the same technology we have had for years. A prime example of the public piercing this hype came in May 2019, when San Francisco BART bragged that its trains had higher capacity than Elon Musk’s proposed car tunnels.

Other members of the public had pointed out that Musk's hyperloop tunnels were in essence just subways.

Some have labelled this inflationary tendency in the tech industry the “Hype Cycle,” noting the existence of price bubbles during periods of inflationary expectations around new innovations.[3] Perhaps we give added value to new things generally, paying inordinate sums of money for shiny new tunnels and devaluing tried and proven systems like buses. In the case of emerging tehcnologies like Musk's hyperloop, the hype cycle seems to entail the disproportionate movement of funds away from public goods toward private concentration of wealth. This “technological grade inflation” can affect entire industries. For instance, one US government study warned of the over-implementation of costly blockchain technology, finding at least six scenarios in which a traditional database was more efficient than a Blockchain .[4]

At a more granular level, particular product lines may be susceptible to inflation. Numerous scholars have noted the prevalence of grade inflation as a consequence of the ubiquitous adoption of performance metrics under the unilateral control of a supplier: cookies, user engagement statistics, probabilistic ad auctioning, populational micro-targeting, number of views, five star ranking systems, click-through rates. [5] Goldfarb et al. remark that online feedback mechanisms are rife with value inflation: “online reputation measures of marketplace sellers, which are based on buyer- generated feedback, don’t accurately reflect their actual performance . For example, the average percent positive for sellers on eBay is about 99.4 percent, with a median of 100 percent.[7] In one lawsuit Facebook’s advertisement metrics were alleged to have inflated user engagement by as much as 900%.[8] These findings indicate that asymmetrical control of the black box of algorithms may create arbitrage opportunities for value inflation.

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[1]See e.g."Market Equilibrium" https://ops.fhwa.dot.gov/publications/fhwahop08041/fhwahop08041.pdf at 10

[2] Value of Everything; Mazzucato addresses power dynamics of control in the digital age give suppliers asymmentrical control over the price to quality ratio of their products, leading to cases of greater puffery than authentic utility. The degree to which the market price of a particular technology represents authentic “value-added” for society is particularly disputable in digital services, which are subject to extreme informational asymmetries, and distortion by self-regulating firms.

[3]https://www.gartner.com/en/research/methodologies/gartner-hype-cycle

[4] [https://nvlpubs.nist.gov/nistpubs/ir/2018/NIST.IR.8202.pdf]

[5] Dellarocas and Wood (2008) speculate that buyer dissatisfaction and hence the decision not to rank is a better explanation for an extremely high percentage of positive reviews on eBay than underlying quality.[5] Nosko and Tadelis (2015) document the bias in online reputation measures, showing evidence of three times more complaints to Ebay’s customer service than negative feedback scores, suggesting that inflationary feedback in online marketplaces.

Such cases call into question the essential meaning of value creation in the digital world. A number of scholars have found rampant reputation inflation in online marketplaces as well as hotels and travel services See for example Jaffe, Sonia, Peter Coles, Steven Levitt, and Igor Popov. 2017. “Quality Externalities on Platforms: The Case of Airbnb.”; Luca, Michael. 2013. “Reviews, Reputation, and Revenue: The Case of Yelp.Com.” HBS Working Knowledge. Mayzlin, Dina, Yaniv Dover, and Judith Chevalier. 2014. “Promotional Reviews: An Empirical Investigation of Online Review Manipulation.” American Economic Review, 104(8): 2421–2455. Saeedi, Maryam, Zequian Shen, and Neel Sundaresan. 2015. “The Value of Feedback: An Analysis of Reputation System.”

https://andreyfradkin.com/assets/reviews_paper.pdf

Horton and Golden (2015); Filippas et al. (2017); Fradkin et al. (2015); Tadelis (2016).

[7] Similar inflation has been evidenced in online rankings for hotels and travel sites and show biases in ratings for hotels from the online travel sites that are consistent with strategic feedback manipulation by sellers.[7]

[8] https://www.adweek.com/digital/facebook-hid-inflated-video-ad-metrics-error-for-over-a-year-advertisers-allege/