More on Moore’s Law

If you’ve ever dealt with the advertising industry, we probably know about the cognitive threshold under which you do not gain much by advertising, and over which you enter the prospect’s mind. This threshold determines whether the prospect will be able to retain and recall anything from the information advertised.

The handicap principle shines a new light on our understanding of this phenomenon. The threshold can be understood as the minimal expenditure required to become a handicap, and honest signal of quality. The sheer amount of advertising you do. The message is not the content, but the amount. A sort of “if they can afford to spend so much money on advertising, it must be good” school of thought.

According to professor Gilbert in his Lottery winners and Dogs & Pigs on a leash papers, we go back in out memory and try to recall the frequency of images that pertain to what we want to assess. This is why you need to concentrate the message in time, and why a threshold is needed in a marketing campaign.

Model for a Cheat

A corollary to this is that there is a model for a cheat.

In the above advertising example, the cost of advertising is born by the enterprise advertising. In nature, antlers have to be regrown each mating season, gazelles cannot borrow energy from the future. There is a distinct time slot for each signal. No spill over allowed. This is the frequency (amount over time) of advertising, or antler size in a season.

You can break this model if you break this natural time slot. Ponzi schemes like Madoff’s did precisely this. They signalled success by stealing from the future. The reason us humans are vulnerable to this, and so many people get caught in similar Pyramid schemes, is probably that our brains aren’t geared to detect this effectively.

Another example can be taken from my childhood experience in my family’s summerhouse north of Copenhagen, in Denmark. Most of the houses in the neighborhood are heated with an oil furnace. You have an underground tank outside that is filled up on a regular basis. I remember one company that did this service changed its model from filling up when empty, to everyone in the same area on same day. This was very clever as people saw the oil trucks everywhere that day. They concluded that the company had to be doing well and be a good company since there was so many. They forgot they didn’t see any next 2-3 month.

In this case, the time slot is broken. The distribution over time of occurrences is uneven. The cheat is to steal from future occurrences to create high frequency point events.

So bear this in mind both when receiving and emitting honest signals. Ask yourself, where does the cost of the signal come from?

EDIT: I read Dominique Olié Lauga’s PhD thesis titled Essays in Behavioral Industrial Organization, Corruption, and Marketing, in which she argues that advertising has an intrinsic value. She comments that “this is in contrast with the view that advertising is a pure money-burning device”, referring to Nelson (1974) describing the idea of advertising signaling quality by dissipating part of the profits, that Kihlstrom and Riordan (1984) and Milgrom and Roberts (1986) formalize. This is similar to Nobel laureate Michael Spence, who first describes a model in which education does not affect productivity, then adds intrinsic value to it in a more elaborate model.