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Beyond the wisdom of crowds

Beyond the wisdom of crowds
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First Published: Tue, Aug 25 2009. 09 50 PM IST

Photo: Madhu Kapparath / Mint
Photo: Madhu Kapparath / Mint
Updated: Tue, Aug 25 2009. 09 50 PM IST
Economists have spoken of the madness of crowds; at other times they have described the wisdom of crowds. Both are important facets of collective human behaviour, but behavioural economics is now throwing up a new perspective for looking at congregations of people—that crowds in marketplaces also represent significant economic value to the people who own them, even if such ownership is largely transient. The first-order economic effect of crowds is quite self-evident in higher immediate-term potential consumers and sales, but the second-order effects create equal if not more value in the short and long term. What are these effects which create such sustained value, and how do crowds affect or define consumer behaviour?
Photo: Madhu Kapparath / Mint
Perhaps at the root of such value is consumers’ strong belief in the wisdom of crowds. People generally believe that if a market or a retail store is crowded, there must be something good on offer. If it is very crowded, there must be something fantastic on offer, else why would so many people be milling around in that specific location? We believe that fellow human beings behave rationally, and quite ironically this causes an irrational herd mentality. Hence markets greatly benefit by having crowds within them.
In fact, a few retailers have learnt to their benefit that creating the perception of crowds within their stores and malls, therefore, brings in many more consumers very quickly. Some retailers, like political parties, therefore go the whole distance and hire crowds which walk around in their premises. Other retailers and malls smartly place right in front of their stores the specific counters which tend to draw the most crowds—for example the “discount price” or “fresh arrival” counters. Either way, they are leveraging the economic value of crowds.
A second underlying reason why crowds create immense and real value is that human beings feel secure if they are in the midst of crowds. Imagine shopping on an entirely lonely street at night, or even in bright daylight. Most shoppers would avoid such a scenario, even if the wares on offer there were much sought after. Crowds confer a feeling of physical safety, though in actual fact they hide pickpockets and similar cheats more successfully than an empty street ever can. Also, in yet another example of behaviour which is not strictly rational, many people are intrinsically not comfortable with empty spaces, even if these markets are otherwise fully secured.
This is the prime reason why a busy Oxford Street in London or Commercial Street in Bangalore attracts so many shoppers at all hours of the day. In a sense, these streets own their crowds and derive significant commercial advantage from their presence. To create and sustain these crowds, it is important for any market to offer a wide category of goods, and to have in place at least a few shopping destinations which attract the large middle class.
A third and interesting way in which crowds create economic value is the manner in which they contribute positively to the shopping experience of consumers. Consumers derive delight from their shopping not merely through the goods they buy, but also by being in the company of similar people, activities such as observing and commenting on the fashions which are worn by their fellow shoppers, and by occasional snatches of conversation with interesting people whom they meet. Therefore, consumers will migrate to markets where crowds offer them these interesting experiences.
Marketplaces can leverage this insight by establishing plazas or in-store locations where people can rest, observe and interact with each other. Many city centres in Europe have done exactly this, which also creates economic value in a different way—by making consumers linger longer, since they have had a place to rest and refresh themselves during their shopping voyage. And when consumers stay longer in a marketplace, they also tend to buy more.
Fourth, it is not merely the quantity, but also the quality of a crowd which creates appropriate value for marketplaces. As an extreme illustration, middle-class women would not want to shop in a street where crass drunk labourers or drug peddlers loiter, even if there are many other sober people in the surroundings. Similarly, luxury shopping areas such as Bond Street in London derive value from having only well-heeled crowds and implement many conscious and subconscious measures to keep others out.
The quality of crowds creates value not merely by enhancing the ease of shopping, but also by making certain marketplaces or malls fashionable for certain consumer segments. This is why the affluent class in Delhi boasts of having shopped in South Extension or Khan Market, and why the elite everywhere wants to shop in Harrods at Knightsbridge. Appropriate crowds create great pride and appeal for specific marketplaces.
Finally, it is relevant to note that crowds create economic value only up to a certain threshold. If consumers believe a market is too crowded on certain days or hours, they tend to keep away, which leads to negative value. This is equally true of markets which are so crowded that they are perceived as having inadequate facilities for parking or refreshment.
Building quantitative frameworks which model the impact of these variables and therefore, determine the value of crowds can generate useful learning for markets. A similar thesis also holds true for virtual markets though some key behavioural drivers online are likely to be quite different from the brick-and-mortar world. So the next time you see a crowd, remember that you are not just seeing large numbers of people, you are actually witnessing congregations which create significant economic value in so many different ways.
Harish Bhat is chief operating officer, watches, Titan Industries Ltd. These are his personal views. Comments are welcome at theirview@livemint.com
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First Published: Tue, Aug 25 2009. 09 50 PM IST