There has been a lot of discussion regarding the valuation of social media stocks such as Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB). Rather than burden the readers with interesting but highly speculative comparative calculation, I want to invite the audience to explore the lollapalooza effect embedded in Facebook’s business model together. It’s truly a hell of a case study in terms of human misjudgment and as we will see later, by combining a few powerful human tendencies, Facebook has created a wide moat.
I. Social Proof Tendency
If we think about it, in the digital area where human interaction is increasingly digitalized, the way we seek social validation has changed from the days of getting a nod on the sidewalk. Social validation is still important and boy does Mark Zuckerberg know every bit of that powerful human tendency. You post a status or a picture, someone clicked the “like” button, boom, social proof easily achieved.
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- FB 15-Year Financial Data
- The intrinsic value of FB
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2. Pavlovian Association:
Pavlov’s dogs drool at the sound of bell, modern human beings drool at the buzz of the smartphone. The buzz may indicate a message, an email, a Facebook update, or that someone liked your status post. Once you post something on Facebook, you will subconsciously wait for that magical buzz from your smartphone. Now we have social proof and the Pavlovian Association working together and you wonder why it’s so addictive to the modern youth.
3. Availability Bias
As everything becomes mobile today, they also become more available. Facebook realized that in order to get the users hooked, it has to create the availability. Is it a wonder why every social media company is pushing for the mobile platform more than the traditional desktop and laptop platform? Instead of calling about everyone you know and shamelessly bragging about something that made you feel good about yourself, now you just need to push a button on your phone or your tablet so all your friends immediately know.
4. Reciprocation Tendency
You scratch my back and I’ll scratch my back. In the Facebook model, it is “You like or comment on my post, I’ll like or comment on yours.” We got validation from “likes” or “reinforcing comments,” which is a subtle favor if we really think about it. What do we do when we receive a favor? Social norm tells us to return it. Once you returned the favor, you are immediately subject to the commitment and consistency tendency.
5. Commitment and Consistency Tendency
You pound in what you shout out. But not only that. When shouting out on Facebook has become a habit, you are committed to it and you have to do it consistently, otherwise you will lose social validation. And once you started to follow someone or like someone’s post, you are pounding in that behavior. You’ve committed to that person you may or may not know that well. He or she is expecting your “like.” You’ve liked it before and you will like it again. It’s reciprocation and commitment and consistency.
6: Excess Self-Regard Tendency
Let’s face it. Human beings have this inborn tendency to make ourselves feel good. Why do people even post something on Facebook? Harvard University research revealed that “the act of disclosing information about oneself activates the same part of the brain that is associated with the sensation of pleasure, the same pleasure that we get from eating food, getting money or even having sex.” Well, if we pay a little attention to the general pattern of posting, we’ll easily find that almost every posting is an exercise in personal branding and in some instances bragging. We are eager to let other people know the stuff that makes us feel good. We don’t even care if others engage with it. We just want others to see it and like it. We just like to feel better by posting things that will make others jealous. I don’t think it is good for the civilization that envy and vengeance can be spread out so fast and so widely. Facebook is testing a system where people pay $2 to highlight their status update. I have no doubts this will exacerbate the mass follies we already see.
7. Deprival Super-Reaction Syndrome
According to a survey by a renowned online marketing research firm, a whopping 56 percent of Facebook users believe that not regularly checking their sites means they’ll miss important updates, news content or events from the pages they follow. Researchers from the University of California and University of Rochester found that “if individuals’ psychological needs were deprived, a fear of missing out also provided the temptation of writing and checking social media updates while driving.” I don’t think any research is necessary to find such obvious thing but this validates Munger’s statement that the academic psychology departments need to incorporate the basic human psychological tendencies.
So here we go. With at least seven powerful human tendencies working together, we are subject to the most extremely powerful lollapalooza effect that has ever been created. Unfortunately this is the wide moat of Facebook and they will undoubtedly try to monetize humanity’s folly. I am not writing this article as a pitch to buy the stock of Facebook. I don’t know if it’s overvalued or undervalued. We can try to model the extent of human folly but that exercise sheds no more light than the exercise of understanding this massive lollapalooza effect so that we can avoid being a victim of it. My intention is to remind, not to inform.