Sociate

Heretics are sometimes right.*

Princeton psychologist Daniel Kahneman was just awarded the Nobel prize for economics (NY Times story). Among other things, his (and others') work in what is now called behavioral economics punches holes in one of the main tenets of classical economics, Rational Expectations Theory. It turns out that people don't always make rational, self-interested decisions. We behave "irrationally" all the time.

In the same vein, 29-year-old associate professor of econ at MIT Sendhil Mullainathan just won a MacArthur Fellowship. Much of the coverage of his prize mentioned his research in executive compensation, a hot issue these days (another NY Times story). Not much mentioned that he is a rising star in behavioral economics.

Behavioral economics isn't the only discipline with insights into our seemingly irrational behaviors. I've put some broader ideas on my wiki, here.

* Well, not all Nobel laureates are right. In fact, Kahneman's work disproves the work of Harry Markowitz (also a Nobel laureate) and other economists. It's amazing how much sway the Nobel awards committees have on business and public perceptions of what's right.

There is considerable debate on whether music file sharing is harming or helping CD sales. I haven't seen evidence to convince me either way (especially removing other effects, like crappy music releases), although I tend to lean toward the effects being neutral to positive so far. But I don't think that matters, because CDs are a dead idea (and online services that are more constrained than CDs are deader ideas).

Physical music distribution is comically inferior to the all-electronic alternatives. In Being Digital, MIT Media Lab founder and director Nicholas Negroponte briefly explains the difference between atoms and bits (physical goods versus electronic goods) by contrasting the current music business with its electronic alternative. Negroponte’s example is just a phrase, so I have made the steps involved in physical production and distribution of music more explicit in the following list.

To get recorded music from a band in a studio to a listener in today’s most popular format, the audio CD, someone has to:

1. Record a tune, burn a master version


2. Copy it onto CD audio discs


3. Put each disc in a plastic “jewel box”


4. Add security measures to the jewel boxes (holographic “dogbones,” magnetic alarm tags, etc.)


5. Wrap the jewel boxes in plastic


6. Put them in boxes, put the boxes on pallets, label them


7. Wrap the pallets in plastic, put them on trucks


8. Send them around the world through transit terminals, warehouses, etc., to local stores


9. Protect them in transit


10. At each store, unwrap the pallets, open the boxes


11. Put each CD into a plastic security sleeve to prevent shoplifting


12. Label them, record them in inventory and put them into displays, from which


13. Customers select them, usually without hearing them, and


14. Go to cashiers, who remove the security sleeves or disarm the magnetic alarm tags and


15. Put the CDs into plastic bags


16. So customers can take them home and


17. Throw away the bag


18. Unwrap the plastic wrap


19. Remove the security devices


20. Open the jewel case


21. Put the disc into a player


22. And play the tunes

Whew! An ecologist’s worst nightmare, screening hourly at a store near you.

There are also a few other inconveniences. When a new technology replaces an old one (vinyl to 8-track, 8-track to cassettes, cassettes to CDs, CDs to DVD Audio or online subscription services -- the celestial jukeboxes), you get to buy the same tunes all over again. There’s no upgrade policy. Scratch or lose the CD and you get to buy a new one. And all the tunes, trapped on CDs, aren’t connected to anything in the rest of the online world. They are inert and unchangeable.

MP3 music files look pretty appealing, don’t they?

David Kirkpatrick mentioned me in a Fortune.com piece on how the music industry is alienating its customer base in order to protect the only asset it thinks it has: the music.

I have a collection of good music-industry readings here.