As I’ve mentioned before that I have more than a passing interest in economics it won’t come as a surprise that I’ve enjoyed ‘Why most things fail’ by Steve Ormerod.
Amongst other things he extends the idea that most of the theory you get in economic, and dare I say, marketing books, bears little relation to reality. A big theme is how most ventures are doomed to failure thanks to the impossibility if making good decisions in the face of bewildering variables. Life is just too complex.
This where I want to pick up on ‘Game theory’, but first I need to begin at the beginning. Most books will tell you that markets are perfect mechanisms for setting prices thanks to demand and supply. If something is scarce, if lots of people want it, the price will be high. But while it’s true to a point, it’s just too flawed for proper business decisions. Don’t believe me? Take a look at Ebay.
Pick a popular item, something that sells every day. Look at the selling price. How come it’s never the same? All those variables – most acutely irrational human behaviour. We still do not know exactly how markets work. Seriously.
Take supermarkets. They play an elaborate game on two fronts. First, they’re facing off against consumers ina daily game of balancing what people want to pay and what the supermarket wants to charge. Setting the price for own brand baked beans isn’t as simple as how much of it is about, it’s also about fluctuating disposable income, food fashion, culture in general, weather, debt and bills.
Then there’s the other game with competitors. How each prices their stuff affects the other. They don’t KNOW how much the other will charge, they have to assume. It’s a constant jostling for position, making you’re move while subject to imperfect knowledge of what the opponent will do. This is ‘Game theory’ – the discipline of multiple players making decisions to maximise their own returns, in the face of imperfect knowledge of what the opponents can, or will do next. There’s a price war starting right now between Tesco and Asda in the UK. Despite what they may say, neither of them really know how it will end.
It’s a truism of human bahaviour. The Bay of Pigs was a classic example of brinkmanship, as was the whole Cold War.
It’s a game of chess, where a good deal of your strategy has to take into account what the other will do. Mathematicians, economists and other great thinkers have spent decades trying to figure out solututions to the simplest scanarios. And they just can’t do it. Even the biggest computers in the world can only work out all possible moves for the first few moves in chess, after that it just get’s too complex.
No one truly knows a perfect way to set price in market, not just because of complexity, it’s also down to the fact that humans are simply not rational. You have the best ideas and people just won’t behave.
For planners and marketers………if you can’t even fix a price perfectly – since you can’t predict what people will do next – imagine trying to map a market, or doing research or, gulp, pre-testing. You need to have a good idea that brand communication will work, but you cannot know for sure, and the more you rely on people rationally doing what the data predicts they’ll do, the more likely things will go horribly wrong.
Positioning can never be an exact science, nor can developing work for a specific, quantifiable objective……. it’s too complex and people are, well, people. That may sound like bad news but I find it quite liberating.
Trying to appeal to rational beings is doomed, information doesn’t work by itself, but all the economic geekery suggests to that relying on data to predict the future is very, very dangerous.
Of course you should sort out empirically what others in the market are, but that should be no more than a guide, as should or telling people what the data thinks they want to hear. You simply cannot predict how people will behave to that level of perfection.
Never forget what the market seems to be telling you, but in the end, it’s the ideas that transcend TGI’s and mapping stuff that matter don’t you think?
NORTHERN PLANNER 