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In my previous article, I wrote about the four layers of information that an investor can gather while researching a company. Towards the end of the article, I wrote the fourth layer of information and proposed a few big-picture questions regarding Facebook (NASDAQ:FB) as an example. Three of the questions are as follows:
What psychological tricks have the Facebook engineers deployed to make Facebook and Instagram behaviorally addictive?
What is the underlying design framework of how the "like" button and status update work?
Is it moral to induce digital addiction?
Here I'll share the process and resources I used in my attempt to find answers to these questions regarding Facebook and other internet companies.
The first step is easy -- a simple Google search is all you need. Type in the question, "Why is social media so addictive?" or "why is Facebook so addictive?" You should see a number of articles, and you can go through all of them.
A highly useful type of research is what I call the "knowledge applications," such as Quora and Zhihu. There are also paid mobile apps that hire experts from different disciplines, and you can pay to subscribe to the content, which might include newest Silicon Valley technology, book summaries and specific courses such as behavioral psychology. Most of the apps will have an internal search function, which is a bit different from the Google search because the app-specific search functions include only search results from the database within the application, and the quality of the results is somewhat guaranteed. Whereas Google search results are often hit or miss. In other words, there's a big discrepancy of quality between good articles and bad articles. For instance, when I searched "why Tik Tok is so addictive," a top-ranked article gave me three excellent explanations:
? The intermittent variable rewards.
? The Zeigarnik effect.
? The "like" button.
? Challenging yet achievable tasks.
Another article led me to a book called "Irresistible: The Rise of Addictive Technology and the Business of Keeping Us Hooked" by Adam Alter. It's a fascinating book that explains the phenomenon of behavioral addiction and what causes today's digital products to be so irresistible. Alter also revealed the "dirty secrets" of modern technology companies whose engineers spend thousands and thousands of hours designing digital products and tweak them over time until they become almost impossible to resist.
One big idea of the book is that we all have what is called the "pleasure center." The pleasure center is responsible for behavioral addiction. This is how it works:
There are four phases of becoming behaviorally hooked. During the first phase, the pleasure center is stimulated and dopamine is produced, which then generates the feeling of pleasure. This is when you hit the "like" button on Facebook for the first time or when you received the first "like" from your friends for the first time. Then the next phase comes, which is learning and reinforcing this pleasure memory. We start to post more status updates, press the like button of our friends' status updates. It feels good. Then comes the expectation phase, when we start to expect the occurrence of pleasure-bringing experiences. This is when we expect someone to like our status updates after we post them. The last phase is addiction. We start to get anxious when the stimulus fails to take place or doesn't take place on time. So we post more status updates and try harder to get more "likes."
The horrifying fact is that behavioral addiction has the same mechanism of action as drug addiction. But more unsettling is that there are many brilliant and talented engineers who are the top graduates of the best universities in the world and whose job is making us more and more addicted, consciously or unconsciously. More specifically, there are six major tricks used by those brilliant tech engineers to get us hooked to their digital products.
1. Compelling goals that are just beyond reach.
2. Irresistible and unpredictable positive feedback.
3. A sense of incremental progress and improvement.
4. Tasks that become slowly more difficult over time.
5. Unresolved tensions that demand resolution.
6. Strong social connections.
Instagram and Facebook are addictive because some status updates attract more "likes" than others (irresistible and unpredictable positive feedback) and it's gratifying to like your friends' photos (strong social connections). As you keep adding friends and posting more widely liked status updates, you feel a sense of incremental progress and improvement. At the same time, the tasks of adding more friends and posting more appealing status updates become more difficult. All of these tricks are designed to get us more and more addicted.
By now I've gained a much better understanding of the underlying design of the addiction mechanism deployed by Facebook (NASDAQ:FB), why behavioral addictions are so rampant and how they capitalize on human psychology. One argument for companies like Facebook is that digital addiction is a source of moat - like tobacco companies. And it doesn't do any physical damage to us directly. As we get more addicted to the digital products, we spend more time on them. The digital apps know us better and better over time and become more valuable to the advertisers who want to do targeted ads. It's a great business. On the other hand, you can make the argument that digital addiction is just as bad as drug addiction because in severe cases, both will have harmful effects to one's life.
There is a book about physicist Richard Feynman called "The Pleasure of Finding Things Out." It's a wonderful collection of Feynman's short works. How Feynman explains physics and how he explores the world are truly inspirational. In business analysis, it's also about finding out how the world works and how the business operates, which requires much inquiry and exploration. The point is, it doesn't matter which side we take. What matters is asking the right questions and exploring the answers. Doing so will absolutely deepen our understanding of the business we analyze.
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This article first appeared on GuruFocus.