Intuition in business is great but our decision-making can be enhanced by analyzing information. Super Crunchers is one of those books that exposes how technology and data can and does affect your day-to-day.
Based on computer algorithms, Netflix recommends us movies and eHarmony recommends a mate. All of this is based on custom formulas and using a mathematical tool called regression to make predictions. Capital One uses regression to determine what interest rate might tempt you into accepting an offer. The Internet radio service Pandora brings in musicians to analyze music so that when you pick a favorite artist on their site, they can play tunes that match your taste.
One tool Ayres talks about is randomization. The medical community uses randomization extensively in the testing of new pharmaceuticals. Larry Katz, a former chief economist for the Labor Department, found that by providing job search assistance to the out-of-work, people found jobs faster and the federal government could reduce payment of unemployment benefits by two billion dollars. The same type of number crunching can even be used to prove if basketball players are shaving points at the end of game to cause their team not to cover a point spread.
One of the more unusual and innovative ways computer number-crunching has been put to use comes out of Hollywood. Dick Copaken, formerly a successful Washington lawyer, set his sights on the movie industry. In particular, he and his mysterious team at Epagogix study the effect a script has on box office returns. The folks at Epagogix have come up with a number of components in a script that they have “weighted” and applied certain dollar amounts to. The formula is secret, but unbelievably accurate, and several studios are quietly using their services.
Not everyone is jumping on board though. Ayres tells a story of Copaken arranging a meeting with two hedge fund mangers and a studio head. The hedge fund managers were interested in putting strong financial backing behind a few movies, requiring that Epagogix’s formula be applied to the optional scripts. The studio head, fearing he’d lose his standing in the industry if he did something so radical, declined the money and opportunity. The hedge fund managers, surprising Copaken, were delighted with the meeting. They told him: “what you just showed us here in Hollywood is a ten-lane paved highway of opportunity. It’s like they are committed to do things the wrong way and there seems to be so much energy in the culture and commitment to doing it the wrong way, it creates a fantastic opportunity for us that is much more durable and enduring than anything we’ve ever seen.”
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