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Bubbles are Caused by People Bad at Math

Invariably, financial bubbles get created because people ignore fundamentals and start using questionable math to justify their own logic.

The rest of us sit below the ether trying to make sense of it all, while being told we "don't get it."

Maybe.

Or maybe it's because every time a new business model gets created in the technology industry, people make up a whole set of useless metrics to measure it that never seem to track back to revenue. Or profit.

The flavor du jour is widgets, and nothing captures the essence of absurd math better than this "article":

Widgets: The Marketer's Recession Survival Tool

Ignoring for a moment the obvious conflict of interest from the author (he's the CEO of a widget company, and references his own company in the post), here are three basic economic reasons this article is totally bogus:

1. Value is NOT a function solely of cost. The fact that social networking inventory is cheaper than other advertising options does not inherently make it a good value. Value is measured as cost versus return. Perhaps it is cheaper, because it doesn't perform as well. Many articles have been written about advertisers getting negative ROI from social neworking. The reality is that quantifiable ROI measurements (read: driving revenue, not clickthroughs) do not exist.

2. The success of an industry cannot be measured by a venture capital investment.  Slide may have raised money at a high valuation, but so did Kozmo.com, PointCast, Flooz, Boo.com and countless others. Like any other industry, not all investors are smart, and even the smart ones make stupid decisions every once in a while. A venture capital investment should be taken for what it is: one person's opinion. An opinion that is statistically wrong 70-90% of the time.

3. ALL marketing drives consideration and preference. Forrester Research who crafted the ridiculous "research" report, argued that widgets "have a measurable impact on prospects' decisions in the consideration stage." The analyst has an incredible grasp of the obvious. This is like arguing that eating food will impact hunger. The entire marketing industry is built on impacting awareness, preference, and ultimately spend. All he argued here is that widgets are, in fact, advertising.

These type of articles are very dangerous. They offer very little in the way of fact (what are the metrics for measuring ROI? What were the actual results?) or substance, yet can sway public opinion.

Only two things in the whole article make any financial sense:

Forrester is trying to sell research reports, and Michael Jones is trying to sell widgets.

And neither makes a compelling argument.

April 26, 2008 | Permalink

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