So it’s IPO time for the leading social commerce platform on the planet, and Facebook thinks it’s worth half of Google ($104bn vs $196bn), as much as Amazon ($101bn), and twice eBay ($52bn). But here are three reasons why a psychologist wouldn’t invest, and why, if you are in the social commerce game, a psychologist wouldn’t put all their eggs in the blue Facebook basket.
1) Intention trumps Interest: Commerce notwithstanding, Facebook’s future will depend largely on its advertising revenue, which will depend on advertising effectiveness. But the Facebook advertising value proposition – superior targeting based on peoples interests – pales to insignficance compared to the value proposition of search advertising based on intentions. Psychologists know that interests are lousy predictors of behaviour – intentions are far better. Your likelihood to drink champagne tonight is very poorly correlated with how much you like champagne, but highly correlated with whether you intend to drink champagne. Which is why the intentionality of Google search ads stand head and shoulders above Facebook ads based on interest. With GM the latest business to pull Facebook advertising, businesses get this.
2) Scarcity drives Value: Economists like to talk about the network effect – the more people use something the more valuable it becomes. Psychologists like to talk about the opposite – the power of scarcity – the fewer people have something, the more valuable - and the more cool – it is perceived to be. Diamonds are perceived as – and are – valuable precisely because they are a scarce commodity. Facebook is perceived as cool so long as your aunt and grandparents aren’t on Facebook. With low barriers to entry for alternatives, Facebook’s very ubiquity could trigger a mass exodus.
3) Mind Myopia: Minds are myopic, which means we tend to overvalue the importance of the ‘here and now’ and see the present an an insight into necessity, rather than an opportunity for change. Facebook is big today, so we tend to falsely extrapolate that Facebook will be big tomorrow. History and MySpace et al prove us wrong over and over. Our inability to look at things without the sensory data of the here-and-now means we over-invest in the present and the status quo, and not enough in the future.
So whilst a psychologist may see the value of Facebook as a social commerce super-platform, helping people buy where they connect and connect where they buy, that psychologist would be wary of investing in a $100bn valued Facebook.
Today’s article is sponsored by Milyoni: The Leader in Social Entertainment