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Facebook and the Lollapalooza Effect

June 06, 2014 | About:

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.

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.

About the author:

A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

Rating: 4.7/5 (12 votes)



The State of Long-Term Expectation
The State of Long-Term Expectation - 6 years ago    Report SPAM

I am extremely skeptical that Facebook has a moat. What you've described is basically why people are hooked on social networks. Social networks and Facebook are not the same thing. It's akin to saying you should invest in PanAm because people are hooked on air travel.

The problem with social networks is this: they benefit from network effects early on, but then the network effects work in reverse. You want to join the social network your close friends are on, but you want to get off of the social network once you are "friends" with your annoying aunt and hundreds of random people you met just once. We've already seen this play out on earlier social networks (Myspace, Mixi, etc.). Facebook seems to be hitting that point - anecdotally, my friend requests from Facebook have dried up, and I'm seeing fewer and fewer people posting updates. There's no moat because switching costs are extremely low - it's very easy to be part of multiple social networks, and you just move onto whatever social network is in the "sweet spot" - your close friends have joined, but you haven't been friended yet by people outside your social circle. That's already playing out with young people gravitating towards Twitter and business professionals to LinkedIn, etc.

Varunfriend premium member - 6 years ago

Nice article.

There is another bias at play - Bias from contrast-caused distortions of sensation, perception and cognition.

People are used to the Facebook experience. It has to keep generating new experiences otherwise ppl will move on to another social network. There is tremendous incentive for others to steal their users. Combined with the low switching costs the odds are high that it is only a matter of time before people move on to something else.

Thats the loollapalooza effect in reverse ...

Grahamites - 6 years ago    Report SPAM

The State of Long-Term Expectation: First of all, thank you for your thought-provoking comments. I agree with certain part of your comments. Please note that I didn't say LinkedIn or Twitter have wide moat. Facebook does have a moat in my opinion. If you disagree, please consider this question: Of all the social network stocks, why FB made $2.8 billion operating income and $1.5 billion net income on Revenue of $7.8 billion. That's a remarkable margin even compared to some great businesses such as Coca Cola while almost all other social network stocks are losing money. Like you, I was skeptical that FB has a moat in the beginning, but now I think it does have a moat. You can't post that many pictures or status update on Twitter or LinkedIn so you are not getting the full loollapallooza effect. Facebook enjoys the full loollapalooza effect and that is reflected in its financials. I don't know how long this moat will last but I'm reasonably sure if you give me $50 billion dollar to replicate a Facebook, I can't do it now.

You are right on the problems with social networks but that doesn't preclude Facebook to have a wide moat, right?

Thank you again for your commments.

Grahamites - 6 years ago    Report SPAM

Varunfriend: Thanks for the comments. You are right and I'm ignorant enough to have omitted this bias you mentioned. Facebook is constantly generating new user experiences and users do constantly compare new features with other social network websites. It's easy to be a copycat in terms of new features but it's near-impossible to copy the network. I think Zuckerberg is smart enough to figure out what they should do to keep up with the changing customer taste.

Varunfriend premium member - 6 years ago

I agree with you Grahamites- it'll be interesting to see what prevails, the network effect or the low switching costs. The fact that Google hasnt been able to make a dent suggests it may be the former, the fact that Whatsapp and Snapchat have been able to get users suggests it may be the latter.

I am certainly not smart enough to know how it will pan out, but I am watching with keen interest.

Grahamites - 6 years ago    Report SPAM

Varunfriend: I think you have the right mindset. It is likely unknowable for most of us, if not all so watching on the sideline is a wise thing to do. I do think that the Whatsapp and Snapchat situation is different though. They are essentially text message in disguise and if you think about it, they don't really enjoy the big lollapalooza effect. There may be a lollapalooza effect on a much smaller scale in action such as the combination of Reciprocation, Availability and Pavlovian Association. But the more powerful Deprival Super-Reaction Syndrome and Social Proof are not present.

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