The Sharing Economy, Disruptive Innovation, & Regulatory Oversight

by Nick Charney

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The sharing economy is all the rage right now, businesses built to enable collaborative consumption are cropping up everywhere. If you aren't yet familiar with the sharing economy, here’s a video primer courtesy of Rachel Botsman:

While much of the enabling technology underpinning the sharing economy may be new, it’s somewhat of a step backwards in terms of economics in that it is a return to peer-to-peer exchange enabled by the Internet. At its core the sharing economy is about unlocking the value in idle products and services by more directly connecting supply to demand, making it disruption innovation par excellence in that it offers consumers 'less with less' (e.g. why own a car when you can share one?).

The fact that collaborative consumption is often referred to as a 'movement' is noteworthy 

Proponents frequently invoke the narrative of individual empowerment and a return to a more humane economy built on trust and personal relationships, more of this from Botsman:

"When we get it right, reputation capital could create a massive positive disruption in who has power, trust and influence" - Rachel Botsman, The currency of the new economy is trust (embedded above)

But can trust can effectively replace regulatory oversight? To be honest, I'm not sure — these are emerging and disruptive markets. People’s adoption of services like Uber and Airbnb seem to be indicative that the general public thinks it can, or at least that they are willing to make certain trade-offs that perhaps they weren't willing to make prior to the Internet. That said, both Airbnb and Uber have faced significant regulatory pressures (See:  Hotels girding for a fight against Airbnb & Lessons From Uber: Why Innovation And Regulation Don't Mix).

But they aren't alone, disruption generally seems to attract regulatory interest

Ask the folks at Tesla about having to deal with rent-seekers or the people behind Bitcoin about being called before the financial regulators in the United States.

But why is this the case?

Broadly speaking, regulation has been used to correct market failures and/or create a series of concessions deemed to be in the public interest. By its very nature regulation distorts markets and in so doing inadvertently creates favourable conditions for incumbents and creates barriers to entry. Regulation can easily be adjusted to reflect sustaining innovations but struggle when asked to balance the potential benefits of disruptive innovation and the public interest. This likely happens for a number of reasons:

1. Governments may lack expertise in the science of innovation and fail to distinguish the difference between disruptive and sustaining innovations. Even if they do distinguish them from one another, they decide to treat them as the same regardless, often in the interest of ‘fairness’ or (even more ironically) 'not picking winners'.
2. Governments are faced with information asymmetry; they have a rich history and reams of data to support their existing regulatory regimes but nothing comparable for new entrants, so there is a propensity to inflate the risk and use exceptions to prove the rule.
3. Government interests are likely to be better served by incumbents (at least in the short term) than by disruptive new entrants. Incumbents provide steady employment, generate higher tax revenues and have already made concessions for the public good. Disruptive firms often employee fewer people, generate fewer tax revenues (or create economies that avoid taxation altogether) and view regulation as a barrier.
4. Governments have to contend with the concerted efforts of the incumbent lobby while new entrants who don’t have the resources to lobby are forced to try to amplify public support of their businesses. 

What's the remedy?

I get the sense that governments are facing something akin to what Douglas Rushkoff refers to as ‘present shock’ in that in these particular instances governments are unable to learn from the past or see into the future in a meaningful way because they are caught up by the immediacy of their surroundings (points 1-4 above).

If this is in fact the case, then governments may consider accepting short term trade-offs in unregulated markets and investing in the long game whenever they notice that disruptive entrants are offering consumers 'less for less'. Given the circumstances, what other options do they have?

How Nudges Work for Government (and Might Work Against Blueprint 2020)

by Kent Aitken

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In the last few weeks some people took notice of the Behavioural Insights Unit in the U.K. government, which sparked debate about behavioural economics and the "nudge" approach to public policy and social outcomes. It seemed that there were many misconceptions about what nudges are. So a brief primer, then what I believe they could mean to Blueprint 2020.

Nudges

From Wikipedia:

"Nudge theory... argues that positive reinforcement and indirect suggestions to try to achieve non-forced compliance can influence the motives, incentives and decision making of groups and individuals alike, at least as effectively – if not more effectively - than direct instruction, legislation, or enforcement."

An example of a nudge, in contrast to alternatives: recently, New York City tried to stop sales of massive cups of soda on the basis that it was bad for both citizens and society (in health and health care spending, respectively). Here are some options:

• Banning the sale of large sodas, which was their attempted approach, would be regulation.
• Raising taxes on large sodas would be an economic incentive.
• Running ads promoting healthy lifestyles and noting the health risks of sugary soda would be education.

A nudge, on the other hand, would have been something like changing the range of cup sizes so that the biggest cups seem more excessive. Tim Horton's recently did exactly this in reverse, by shifting their cup sizes a notch. If the XL coffee is called a large, it sends a signal that it's more "normal" to drink that volume of coffee.

Nudges can work in conjunction with other policy levers, and can be surprisingly potent. For instance, a study showed that a sign showing speeders a frowning face caused people to slow down more than showing their speed and the associated fine.

A Misunderstood Policy Instrument...

The misconceptions arise from the goals nudges tend to be assigned to. Activities that are almost universally regarded as bad (e.g., theft) are typically covered by direct means, such as laws. Very few people are willing to argue that laws preventing theft unduly restrict personal freedoms. However, activities such as smoking cigarettes are trickier. Here, people invoked the principle that they have the right to make informed decisions about their lives, even if unhealthy. However, back when this debate was ongoing in Canada, it was estimated that cigarettes cost about four times as much in health care costs as they raised in tax revenue. So less smoking was good for Canada, on the whole.

There are many such social outcomes worth pursuing that exist in a gray area for government intervention, and this when is nudges tend to be the best policy instrument. So nudges get maligned as paternalism, big government, and the nanny state. But in reality, nudges are about the implementation method. What constitutes appropriate social outcomes is a completely different question. In considering the utility of nudges, we may as well assume that societal goals are already established, and we're instead at the point of selecting policy levers.

...With an Important Role to Play

So I see this emerging field simply as the recognition that information alone is not necessarily sufficient for people to make decisions that are in their, or society's, best interests. 

This is because humans respond (and wildly) to their environment. It's a fascinating evolutionary quirk for socializing: we instinctively match others' postures, gestures, and even accents to build familiarity, taking cues on what constitutes normal behaviour. However, we've exapted (adapted traits for very different purposes) some shortcuts and rules of thumb in decision-making. The well-known example is the opt-in/opt-out framework for organ donations. Countries get ~90% donor rates with an opt-out model ("check here to be removed from the organ donor list"), and more like ~10-20% with an opt-in model ("check here to be included on the organ donor list"). It's largely because the default choice sends a signal about what is normal.

And there are many such examples. The U.K. Behavioural Insights Team simply acknowledges this, and sets about designing policy instruments for such a world. Their core function isn't deciding what society should be doing; it's taking the scientific method and applying it to the complex world of policy. Developing hypotheses, testing them, and adjusting approaches as necessary (see: Test, Learn, Adapt: Developing Public Policy with Randomised Controlled Trials).

In my view, nudges are scarcely controversial. Basically, if you conducted use testing on policy instruments and tweaked for maximum effect, sometimes you'd get education, sometimes laws, sometimes incentives, and sometimes these bizarre indirect methods that we're currently calling nudges. But it's not paternalism, it's simply a question of what policy instruments work, and work cost-effectively. So I absolutely think we should be exploring this field in earnest.

But Wait, You Mentioned Blueprint 2020

If the premises behind nudges are valid, I think it's important to consider how our organizations' standards, defaults, and procedures (in the parlance, "choice architecture") are affecting our decisions. Since June we've been having this wide-ranging conversation about the future of the public service, and the difficulty of meaningful change is a common theme (see: Where Good Ideas Go to Die and Moving Public Service Mountains, Part I). 

And adding to the many possible reasons, what if, even when we have direction or policy cover for positive progress, we're continuously stacking the deck on the side of the status quo?

An example (which I overuse, but it's easy to explain and so I beg forgiveness): let's say from workflow and policy perspectives, a desk-bound worker and a mobile worker are theoretically equivalent options. The information about mobile efficacy is available, the forms for securing the equipment exist, and both are permissable arrangements. However, when on day one at a job you're assigned a desk, a desktop computer, a landline, and no VPN, what signal does that send to both manager and employee about what is normal and what is aberrant?

Do such procedural barriers become cognitive biases? I would suggest the answer is "yes, and massively."

So when we're looking at moving the public service towards our ideal for 2020, we should be ruthless in examining the environment in which we work. Ideals can’t simply be possible, if forces are nudging in the opposite direction. Ideals have to seem like the standard.

They have to seem downright normal.


Making the Vision a Reality

The U.K. provides another concept to borrow and remix (both internally and externally) - contestable policy. We consult on policy in development; why not solicit feedback on existing policy and process, to see if it works as intended, or if the environment to which it applies has changed?

And we have the tools. This could happen today. Copy and paste into our GC-wide platforms that happen to have discussion threads built in, and just ask: does this still work the way we thought it would?

It’s the same approach as the Behavioural Insights Team: the scientific method, applied to government.

Give people something to strive for

by Nick Charney

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The last time I wrote for the GTEC blog I shared a story about a young boy named Jared and in so doing I explained how an enabling office environment creates a culture where employees can do amazing things for the clients they serve. The flip side of that equation - the one I want to explore today - is that it also allows organizations to do equally amazing things for its employees. Engagement is, after all, about both external and internal stakeholders.

Something else very special happened in that same hotel the year I met Jared. It exemplified the collaborative spirit and demonstrated the enabling power of even the simplest of technologies. The hotel had a voice mail box whereby employees could call and leave a message commending their colleague for a job well done. There was no hierarchy, no silos, no approvals. Just a phone with an answering machine on the other end of it. Every morning the Human Resources Director would listen to the messages, have her morning coffee and write down the names and actions of those recognized by their colleagues. She would notify the managers on duty and they would in turn single out and congratulate the staff member who was recognized by their peers and reward them with a voucher worth $10 of company funny money. In addition to the peer rewards managers had discretion to reward employees on the spot for exemplary service if they witnessed it first hand. For my work with Jared on Christmas, I earned $250 worth of company funny money. Now the thing about the company funny money is that it is funny money. There is no real cash value but they can be redeemed in for a set of official rewards; my $250 worth could have gotten me a $25 dollar gift card for example.

What was fascinating about this type of intermediary reward system is that increasingly more emphasis was placed on the act of peer to peer recognition and that ethos started to spill over among the working level employees. Colleagues starting commending their peers on their good work in difficult situations and redistribute the rewards they received back into the ecosystem. We created a simple rewards and recognition economy without even knowing it long before gamification hit the mainstream. Soon an emergent culture was starting to form whereby your shift wasn't over until you found a colleague worth commending. You started to look for and identify precisely the culture that you wanted to be a part of; and this is where things started to get interesting.

There was a housekeeper named Zophia. She worked the public spaces of the hotel, was incredibly hard working and fabulous with the guests. Over time we got to know her better. She was a Polish immigrant, was working seven days a week across two jobs, and she was the proud single mother of a daughter who was about to graduate high school. When we learned that Zophia was not going to be able to attend her daughter's convocation because doing so meant giving up a shift at work, we knew we had to do something.

A day off with pay was a whopping $1500 of company funny money, but everyone agreed that it was achievable. We started to pool our resources, soliciting donations in secret from our colleagues from other parts of the hotel and making sure that we upped our overall performance to earn maximum recognition from our managers for the instant rewards that we could put towards the larger goal. This was one of the most exciting times to be working for the company. The atmosphere was electric, great service to guests fuelled rewards that drove better performance that brought us closer to our goal which made us want to perform even better; it was a virtuous circle.

We reached our $1500 company funny money goal quickly and immediately approached HR and Housekeeping with the news. We – some 30+ employees – had collectively decided and worked towards giving Zophia a day off with pay so that she could attend her daughter's convocation.

When Zophia found out what we had done (because we obviously kept it a secret!) she was floored; I wasn't there but I imagine her face lit up like Jared's did on Christmas morning.

What's the lesson?

Forget the hype, good company culture is the secret sauce, the technology can be as simple as monopoly money with the company logo on it.

In other words, give people something to strive for that they believe in and they will adopt whatever tools you put in front of them to do it.

*This blog cross posted to the GTEC blog*