Read This Post for Free!

FreePeople often make irrational decisions when money is involved. They’ll go out of their way to save 25 cents, say by driving around and around looking for a parking meter with time remaining, yet immediately after blow that much and more without a thought ($4.50 for a latte, anyone?).

Dan Ariely explores such irrational behavior in his book Predictably Irrational. Ariely is a business school professor at MIT, and much of the book describes simple yet ingenious experiments he’s conducted that demonstrate over and over again the consistently illogical behavior of people when making choices. This field of research, known as behavioral economics, stems from the ground-breaking research of Daniel Kahneman and Amos Tversky’s that won Kahneman the Nobel Prize in economics (I’ve been citing Kahneman for years in my talks on cognitive attention and effort, but it seems that every week for the past year I’ve read Kahneman’s name referenced in a different news story, book, or magazine article. Behavioral economics seems to be the hot topic these days). Ariely’s experiments demonstrate the fascinating ways in which people repeatably make decisions that appear to be contrary to common sense.

Ariely details, for example, the powerful allure of something being free. People’s choices change dramatically when items change from being effectively free (costing one cent, for example) to being actually free (costing zero cents). For example, he tells how Amazon’s customers bought more books on average once Amazon started shipping for free on purchases greater than $25—the increase in customer spending far exceeded the amount that they were saving on the free shipping, but they gladly spent more on books to get shipping for free. More puzzlingly, Amazon saw this behavior exhibited worldwide except in France. Was this because the French were more logical in their purchasing behavior? No. The country manager in France decided not to make shipping free but to reduce it to one franc, or 20 cents, which wasn’t a small enough shipping amount to change people’s purchasing behavior. Is 20 cents really a significant amount when buying a $20 book? No. Is a shipping cost of 20 cents effectively the same as 0 cents? For most people,yes. But when the manager in France reduced Amazon’s shipping charge from 20 cents to Free, French customers suddenly increased the amount of books they purchased per order by the same amount as the rest of the world.

The reason that I am writing about Predictably Irrational is to contest an explanation that Ariely gives for his first example, and one of the most interesting, of irrational behavior. In the example, Ariely describes an offer that I’ve seen before but never understood, which made me even more interested in his explanation (and my alternative one).

Ariely noted an ad in the Economist magazine that offered three different types of subscriptions:

  1. an electronic subscription for $59;
  2. a print subscription for $125;
  3. a print and electronic subscription for $125.

That’s right, the price for a print-only subscription was the same as the price for a print&electronic subscription. Why would they bother offering the print-only option when it was clear that no one would select it because they could get both the print&electronic versions for the same price? Being the good researcher that he is, Ariely decided to run some experiments to determine if there was a reason why the Economist made this offer (Ariely’s ability to set up simple experiments to provide insight into unusual behavior is fascinating).

Ariely asked two different groups of students to make a selection among a choice of Economist subscriptions, but each group were given a different list of options. One group was given the same three selections that the Economist offered. The percentage of students who selected each option was as follows:

  1. electronic: 16%
  2. print: 0%
  3. print&electronic: 84%

No one chose the print-only option (not surprisingly). This begs the question of why one would offer that option at all (the same question that motivated this experiment).

For the second group, the unchosen print-only option was removed and only the electronic subscription and print&electronic subscription were offered (still priced at $59 and $125, respectively). One might expect results similar to those from the previous group (16% for electronic and 84% for print&electronic) since there wasn’t any interest in the print-only option that was removed. The results for this second group were as follows:

  1. electronic: 68%
  2. print & electronic: 32%

Without print-only as an option, the number of people interested in the print&electronic option dropped from 84% to 32%! In other words, by offering an option that no one wanted, 52% of the people changed their preference from electronic-only to print&electronic at a $66 higher cost. What’s going on here?

Ariely’s explanation was that people need a basis for comparison when evaluating whether a deal is a good one or not, and from this comparison they make their decisions. With a similar item for comparison, they can assess the value of an item and determine whether that item is a good or bad deal. He gives a couple fascinating examples where the choices that people make are biased by the presence of a similar and inferior alternative. If people are choosing between A and B, they will choose A more often if there exists a third alternative similar to but inferior to A, and they will choose B more often if there exists a third alternative similar to but inferior to B. Having that third alternative allows people to say to themselves, “I can’t judge whether A or B is a better choice, but I know that A is better than this similar third alternative, so A must be a good deal.”

Ariely suggests that this is why the selection for print&electronic is high when print-only is offered for the same price—the print-only option gives people an alternative from they determine that print&electronics is a better deal, and that drives their choice.

I believe, however, that there’s another possibility for these results: people are more likely to select the print&electronic option in the presence of a print-only option because of the Free phenomenon. Let me explain.

Ariely’s explanation is partly correct: in the absence of knowing the cost of the print-only subscription, people cannot judge whether the combined subscription is a good deal or not. Maybe print-only was $66, and the cost of print&electronic was simply the sum of the costs of the individual subscriptions ($59+$66=$125). Or maybe print-only was $100 and getting the combined subscription would save $34. Or maybe print-only was also $50 and $125 for print&electronic was a rip-off. No one can tell whether both together is a good deal in the absence of a print-only option—in that, Ariely is correct.

The fact that the print-only and print&electronic options are priced the same, however, suggests another explanation for the large difference in behavior between whether or not the print-only option is offered. Ariely made the convincing case later in his book that getting something for free can have a hypnotizing allure on people’s decisions. Providing a print-only option at less than $125 probably would not be enough to drive such a large percentage of people to change their selection from print-only to the more expensive print&electronic option—the print-only option had to be priced at exactly same same price as print&electronics so that the electronics version was free if they chose both. It was the identification of something free that made such a large percentage of people select the print&electronic option. This is similar to the phenomenon observed by Amazon: 20–cent delivery didn’t change behavior but free delivery did. Given the convincing case that Ariely made for this free effect, one would probably have predicted that people would switch their decision from the electronic-only option to the print&electronic option when they discovered that the latter choice would get them the electronic version for free.

So, now you know why so many ads offer free cheap items if you purchase an expensive product A free month of HBO if I get the Lifetime Triple Gold package of cable—sign me up!

A World Champion Encounter

ChessMost people strive to be good at their jobs and hobbies, and this often requires a considerable amount of dedication, effort, and innate skill. To be great at these, however that is defined, is more difficult still. To be considered by one’s peers to be one of the best in that field is rarely achieved. To be known as the best in the world at something…well, that achievement is nearly incomprehensible.

A month ago I played a game of chess against the current world champion in chess in his age division:12 and under. Daniel Naroditsky, who goes to school in the Bay Area, won the world championship in Turkey last fall. The achievement, the skill and effort required, of becoming a world champion in chess in any age bracket is mind-boggling. My game against him was less so. Herein are the details of that game.

Daniel conducted a 17–person simul, where he played against 17 people at the same time. I was one of those 17 people. Playing against many people simultaneously is not a new concept; The great American player from the 1800s Morphy used to play blind simuls with regularity. It doesn’t take a world champion to be able to play a simul successfully, but if there are reasonably ranked players among the challengers, then such a contest can be interesting.

One doesn’t play against a world champion chess player and expect to win (unless one is delusional or also ranked as a grandmaster). When playing against someone rated much higher than you in a simul, your best chance of success is for the higher-level player to offer you a draw if you give him a decent challenge; the higher-rated player would do this if he wants your game out of the way so that he can focus on other games that are more challenging. This was my goal. By the way, I also have hopes to hit a hole-in-one when I play golf, to have my luggage be the first one unloaded when I am waiting at an airport carousel, and to have celebrities talk to me with great interest when I see them in public places. Basically, expecting to win or draw against the world champion in chess is like expecting to beat Michael Jordan in a game of one-on-one.

Back to the simul.

The rules of a simul differ from regular competitive chess in that there is no clock dictating the amount of time allotted for moves. In a simul, you make your move when the champion appears in front of you—not before, and you certainly don’t continue to think about or hesitate in making your move once he appears before you. He then makes his move and proceeds to the next table, upon which the next nervous challenger must immediately make his move. Interestingly, the champion has no time constraint on his moves. After you make your move, he can think as long as he likes. Of course, he’s got other games to get to, so he usually doesn’t take too long. Also, the person in my simul is the world champion—how much time does he really need to decide how to respond to my castling? I can answer that, in fact: less than a second is how much time he needed.

Before the simul began and the challengers were standing around waiting for instructions on how the event would be conducted, it was clear that the majority of the challengers were young kids—possibly Daniel’s classmates from his school but clearly not typical students: they all had that dead-stare in their eyes indicative of a well-honed and massively complex calculating machine behind them. These kids wouldn’t be going to go back home after the game to play hacky-sack, they would likely immediately reference several chess books from their library of similarly sounding titles (“Variations in the French Defense,” “Countering the Sicilian”) and study how they could have better played the opening before firing up the latest Fritz computer program for some quick games of blitz chess.

Five of the adult challengers, including me, stood together before the event, nervousness in our body language. This group was clearly insecure about its age. There was a “please let at least one of the adults put in a good showing” attitude, not wanting our age to be proven irrelevant in this arena, our intellect crushed by a 12–year old. I’ve played chess competitively before (reaching a temporary Master’s rating, sort of…see the link), and one quickly realizes that age and ability do not have a high positive correlation. Sitting down against a 10–year old in a chess tournament, shaking their tiny limp hand at the beginning of the game, hearing their high-pitched “good luck,” facing them across the board as their head barely sticks up above the table, and having them proceed to suffocate the life out of your King while laying waste to your supporting pieces is a humbling experience. I was under no illusion about the fate of us adults, given that only one of us (not me) appeared to have had any experience with chess over the past few years: we would likely be among the first to relinquish our seats at the game for the observation gallery.

The 17 chessboards were set up in a U-shaped table arrangement, allowing the champion to walk from board to board inside the U while the challengers sat in front of their board around the outside of the U. Looking at the game setups, I was surprised at first to see that all of the boards were arranged so that Daniel played as White on all of them. At the grandmaster level of competition, playing as White is a considerable advantage because White makes the first move, and the best that one typically hopes for when playing as Black is a draw (tie). Thus, I was surprised to see that the simul was set up to give Daniel the advantage of White. Even though he was playing against 17 people simultaneously, giving him White in all games seemed an unnecessary advantage for a world champion. After his first move, though, I realized why the sides had been arranged this way.

We challengers sat at our tables and awaited the start. Daniel approached the first table, shook the challenger’s hand, and played Knight to f3. An unusual opening, and certainly a confusing one for a novice, who is used to seeing a pawn advance as the first move—usually the King’s or Queen’s. Daniel then moved to the second table, leaving the first challenger to ponder his response to this opening.

At the second table, Daniel shook the challenger’s hand and played Knight to f3 again. He moved on to my table, whereupon he shook my hand and also played Knight to f3. Daniel in fact opened every game with this move. Now I saw the reason that he was playing as White. Doing so allowed him to keep some consistency among all of the games. Each one had the same starting point and therefore was a a little easier for him to adjust his thinking as he approached each board. Makes a lot of sense.

At first, I had quite a lot of time to consider my moves. The rules were that a challenger had to make their move as soon as Daniel appeared in front of them. They couldn’t make their move before because Daniel needed to see what the move was. They couldn’t delay their move once Daniel showed up because that would hold up the whole process. At first, I had a whopping 2 minutes to consider my move between the time that Daniel left my board and he returned again, which was quite a bit of time to think about a move, particularly early in the game.

Time passed quickly. As Black, I created a King’s Indian Defense, developing the pieces on the King’s side and being cautious with pawn movement in the center and the Queen side. Whenever Daniel appeared before me, I made my move, he thought for a second (perhaps thinking about a game 34 years ago that had produced this same position), made his move and walked on. It wasn’t long before I looked around and saw one of the challenger’s seats empty. The pieces had been put back to their starting position except for the Black King, which lay on its side in the center of the board, slain by Daniel. Victim number one: one of the adults. Mere minutes later, I saw the second victim extend his hand in defeat to the world champion. Another adult gone.

As the position on my board started getting complicated (at least by my judgment), the time between Daniel’s appearances seemed to accelerate. I realized that as more players dropped out, there were fewer moves that Daniel had to make between moves in my game and thus I had less time to spend between my moves. With only 10 games in play, I figured that I’d have just over a minute between moves. If I made it to the final five, I’d have little more than half-a-minute. Time would get tighter the longer I played. For Daniel, however, the time he spent on his moves at my game remained the same.

The game went on. I played it fairly safe, developing pieces and slowly acquiring territory on the Queen’s side while he built space on the King’s side. More players dropped out of the competition, more Kings lay dead in the center of their boards. I had no illusions that I was going to win this game. I also had no illusions that I would give him a good game. With half of the players gone now, I also had no illusions that he was going to offer me a draw in order to focus on more critical games. He was in it for the kill. Most of the time, Daniel watched my move, thought for a second, then made his. I considered it a minor victory each time he actually had to stop and think for 5, 10, 15 seconds about his response before making his move. One time, he actually put his hand up to his chin in contemplation! In the face of certain defeat, I took such minor satisfactions where I could.

In chess, resigning doesn’t have the stigma that it does in other games. In fact, it is considered not only dignified but also good manners to resign if the game is clearly lost. Unlike most sports where one plays one’s hardest even if it is clear that there is no chance of winning, playing chess to the bitter end in a tournament is considered a waste of time and disrespectful of the person who won. This is in fact why the game ends on checkmate and not on the actual taking of the King—if there is no way to avoid the King being taken on the next move, then the game is over.

While in casual games it’s fun to play to checkmate, that rarely happens in competitive chess (except in the movies, where pieces are also slammed on the board and moves are made with the speed of a boxing match). At the grandmaster level, the play is so precise that if a player gets a piece down then the game is over. Players will even resign when they get a pawn down and their opponent has a good board position; the skill level is so high that the slightest advantage is enough to guarantee a win. As my game progressed, I became a pawn down, then we exchanged pieces, then I lost a rook for a Knight and pawn—plenty to cause another grandmaster to resign, let alone a patzer like me. Yet, to resign at a slight disadvantage against a world champion would be absurd, because realistically I should have resigned after his first move were I to resign once I realized that I had no chance of winning. The point of this game was not to play until it was clear who would win—that point occurred even before the game started. So, to resign after being a pawn down was to pretend that losing a pawn was a critical turning point against the world champion: “Oh, now you have me, sir; your pawn advantage has tipped the scales to ensure you a win.” So, I wasn’t going to resign just because I knew I was going to lose. However, I wasn’t going to keep playing until he checkmated me either; to force a world champion to checkmate me would be an insult (“I’m sorry, you are going to have to prove that you can win with a K-Q-B-B-R against my K-N pair…”) I decided that I would resign when I got more than one piece down.

As more challengers bowed out, Daniel’s appearances came quicker. With the time to ponder moves shortening and the game becoming more complex, I started to feel as if I had stalled into a death spiral. Daniel would appear, I would move, Daniel would spend 1–2 seconds considering what I had done (What was he thinking just then: Idiot? Book? How sad? That Hannah Montana is quite a talented singer?), Daniel would quickly make his move and walk away, then reappear seemingly seconds later. I no longer had enough time to assess the move choices that I had—I had to start doing partial analyses and taking my best guess. Soon, I made a mistake and he took my Rook. And then…and then…

And then I saw it. Two moves later I would be able to fork his King and Rook! This was kind of move one giggles with anticipation of playing in a normal game, and I was going to do it against a world champion. I was going to put the world champion in CHECK! This move would simultaneously attack his King and Rook at the same time, so that when he moves his King to safety, I could safely take his Rook. This was my moment, far beyond any outcome that I had anticipated. A series of scenarios rushed through my head once I saw what I was going to do. “Check, sir,” I would say, calmly taking a pawn with my Knight while simultaneously attacking his King and Queen’s Rook. Or I would simply make the move, and he would look up into my eyes with appreciation, reach out to shake my hand and give me the game. Or, making an unforgettable spectacle out of it, I would suddenly rise up out of my chair with the palms of my hands slamming down flat on the table, snatch up my Knight and slam it down on his pawn’s space, knocking the pawn sideways into the board beside me, and growl as loudly as I could, “Check, punk!!” while glaring over the table and looming an easy two feet above Daniel’s head. With this last possibility, of course, I would have been immediately humiliated by his play on the following moves, assuming that the parents in the room didn’t throw me out of the building first. While fantasizing about how I would play my pending check move, Daniel suddenly appeared at my board. I reached forward, moved my Knight while simultaneously taking his pawn with the same hand; he paused for two seconds, moved his King to safety, and disappeared to the next table. Hmm, not the dramatic event I was expecting.

The game lasted a few more moves but, as I said, the end result was a foregone conclusion. I made a couple more mistakes (that I knew of) and then resigned, embarrassed that I hadn’t resigned long ago. I reached my hand across the board, said “Good game,” got out of my chair and stepped back among the rest of the observers. As the organizer put the pieces on my board back to their starting position, except for the Black King which he laid on its side in the center of the board, I looked at all of the other boards similarly set. Two players remained, but it was a matter of minutes before those two also resigned. It was over: 17–0, a clean sweep.

Everyone clapped for Daniel’s performance. I’m not sure what he thought about the whole event, but it was fun and thrilling for me to have the opportunity to play a world champion at their own game, even if the result was a foregone conclusion before the first move.

Chess is a sea in which a gnat may drink and an elephant may bathe, says an ancient Indian proverb. I would say that I’ve slurped from it a little bit in my life, while Daniel is not just bathing but swimming in it and diving deeply. It was great to have been in the water however briefly as Daniel temporarily entered the shallow-end, taking a short rest from his deep-sea diving.

Trolls Attack Innovation: Panic in Corporate Parks!

TrollPatent trolls are becoming a nuisance for technology companies. These trolls are companies/entities that develop or acquire patents for the sole purpose of suing companies that unknowingly infringe on those patents. The infringement lawsuit brought by NTP against Research in Motion (RIM) received a lot of attention in ‘06 when the ruling court threatened to shut down RIM’s Blackberry service. RIM eventually settled by paying NTP over $600 million. The motivation for such patent trolling is clear.

In the June 2008 issue of the Harvard Business Review (HBR), management professors Henkel and Reitzig have an article that offers their suggestions for how businesses can protect themselves against these trolls (which they call “sharks”). In my opinion, their recommendations are unrealistic in that they idealize the willingness of competing companies to cooperate with each other and to forgo competitiveness in technology development in order to protect themselves against the trolls.

The first half of their article is informative and makes very good points about the general situation that exists today. The recommendations they make, however, are not so good. I’ll address each of their five recommendations here and suggest what I believe are more realistic solutions below.

1. High-technology firms should move away from building huge patent portfolios for the purpose of cross-licensing with competitors
The authors correctly point out that one reason companies generate patents is to trade them for patents needed from other companies. Such trading is done because the patents behind key components in complex technical products are usually distributed across all of the major companies in an industry—no one company owns all of the patents necessary to produce a product. Because no company can produce a product solely on technology from their own patent portfolio, companies trade their patent licenses for licenses to the other companies’ patents. The cellphone industry is a typical example of this, e.g., Nokia trading patent licenses with Motorola and Samsung. The authors suggest that this strategy of building a strong portfolio and trading licenses is no longer valuable to companies and should be stopped because it doesn’t protect them from trolls. Indeed, it doesn’t—it protects them from their competitors, who are ultimately more threatening than patent trolls. Just because a patent strategy does not affect patent trolls does not mean that it isn’t worth doing. If I were Nokia, however, I would certainly try to convince Motorola to follow this advice to stop building up Motorola’s patent portfolio.

2. Companies must simplify technical standards and create more-modular designs
These two points are reasoned as follows. The authors assume that simpler technical standards would reduce the number of patents that teach the technology in a patent, thereby producing less opportunity for patent trolls to own the patents on technology required by the standards. The authors assume that modular designs for products would allow a technology component to be swapped out of a product if a patent troll claims that the component infringes on their patent; in other words, redesigning the product to respond to the troll’s threat would be easier with the modular design. Well, easier said than done. The nature of standards committees is such that they are not going to adjust their ways to account for a trend in patent litigation abuse that may or may not impact their standard—to make such adjustments would be considered by committee members as compromising the integrity of the standard. As for the modularity recommendation, a company has many other motivations to modularize their designs; if companies don’t modularize then it is because they can’t or have reasons not to (manufacturability, cost). The assumption behind the authors’ modular strategy is that patented technologies can be easily worked around by swapping different components, while in fact patents can be quite broad and difficult to design around. Whether RIM could have designed around the NTP patent is unclear to me, but there are many patents that are so fundamental that they embody the general feature of a product (e.g., an lcd screen on a remote control, ringtones on a cellphone) and to avoid the patent is to eliminate the feature. Finally, the bottom line is that companies will design products that best serve their customer in a way that best meets the needs of the company (e.g., profitability). The financial threat from patent trolls to a company is not (yet) so great that a company with risk revenue and profitability by changing their whole R&D approach to product design, particularly given that it’s unclear whether the proposed solution will, in fact, eliminate threats from trolls.

3. Companies must begin cooperating with their competitors early in the R&D process
The authors argue that the process of a company developing technology in secret, without the knowledge of their competitors, is “outdated”. The authors acknowledge that companies would be “uncomfortable” to share knowledge with their competitors early in their technology development process, but they argue that by doing so patent trolls can be abated. While the authors state that lawsuits from trolls “could change if more firms started to disclose early-stage information,” they do not explain why this the early-stage sharing of secret information would help against patent trolls. I can’t explain why either. Again, the authors seem to be suggesting that companies would be willing to forgo their competitiveness in order to avoid patent trolls, joining with their competitors in a spirit of innovation cooperation and protection. Again, if I were Nokia, I would strongly recommend to Motorola to share with me their early-stage technology development to guard themselves against patent trolls. I would go even further by offering to sacrifice Nokia to patent trolls by not sharing our technology secrets with Motorola and thereby drawing the trolls towards Nokia and away from Motorola.

4.Firms must foster interdepartmental and intercompany cooperation
Here, the authors discuss the value of getting patent lawyers involved early in the patent process. No argument from me here, although I’m not sure what they has to do with interdepartmental and intercompany cooperation. They then suggest that companies should cooperate with each other, and they give an example where a patent troll bought patents from company A and then sued company B for infringement. The authors suggest that company B would have been better off if company A had talked to company B first and offered a license to them rather than selling the patent to the troll. Indeed! In other words, please don’t sell to trolls. What the motivation is for company A to do so, however, I don’t know. This seems to me to be an unrealistically idealistic hope for how companies could work together.

5. Companies must stop flooding the patent office with insignificant applications
Now, here I agree with the authors. The patent office in the US is overwhelmed, making them more prone to issue patents that are not novel and thereby not valid. Inventions that lack novelty but are erroneously issued can become legal weapons against companies that have used the technology in a product. Also, as the authors point out, a flood of frivolous patents in a field makes monitoring patent activity difficult. The suggestion that companies should unilaterally decide to reduce patent activity for the good of the whole (and their competitors) is, however, unrealistic. Again, as Nokia I would strongly urge Motorola to reduce their patent activity as to not overburden the USPTO and my patent managers who monitor Motorola’s activities.

As can be seen, the solutions that the authors suggest simply aren’t realizable in a competitive world such as today.

I believe that the solution to this problem to is to de-fang the trolls by

  1. making their threats less likely to succeed in court through the combination of new federal laws and Supreme Court guidance,
  2. improving the patent office process in a way that reduces the number of illegitimate patents that patent offices issue.

To the first point, the US Supreme Court has already ruled in such a way that the bar is raised for obviousness. This was done in the KSR case, which I have previously blogged about with respect to the Court’s interpretation of innovation. The authors of the HBR article do mention the KSR case and others, and they clearly support this idea. What remains to be seen on the impact of KSR is if its precedence will have an impact on future court decisions. If it does, the validity of frivolous patents wielded by trolls will be easier to attack.

To my second point about reducing the number of illegitimate patents, a test program (the Community Patent Review Project) is in place in the U.S. to assist the USPTO in finding and analyzing prior art so they can better assess whether an invention is novel or not. In this program, companies are able to see patent applications earlier than normal and to offer prior art and commentary for patent applications in their field of expertise. There are potential problems with this approach that I won’t go into, but trying new ideas to help the USPTO is critical for mitigating the effectiveness trolls.

Finally, there is a patent reform bill in Congress that has been trying to gain momentum for quite a while. One effect of this bill, if passed, would be to restrict the ability to sue over patent infringement. Obviously, this would de-tooth the trolls quite a bit.