Wednesday, September 18, 2013

The Novelty Effect

“Disco Duck” is one of the best-remembered hit songs of the 1970s. Hardly anyone remembers “Dis-Gorilla.” Why such a difference in results for two songs that were so similar, you might have trouble telling them apart? Coming along after everyone had already heard “Disco Duck,” “Dis-Gorilla” didn’t have much to add. It wasn’t very interesting. That’s the novelty effect. “Disco Duck” was viewed differently because it represented something new and different.

It’s easy to see the importance of the novelty effect in pop music but its effects are underestimated almost everywhere else in the economy. It is only after the fact that we recognize how much of a boost a product or an industry gets from the novelty effect, and we underestimate how long the effect can last.

Consider automatic teller machines. We marveled at the convenience for almost 20 years before we started to notice how much time we were wasting at the cash-dispensing machines. Or online auctions. We spent a trillion hours bidding and losing before we realized the system was rigged.

Things that shouldn’t have anything to do with the novelty effect are nevertheless dependent on it, in ways that make no rational sense. IPOs. Computer firewalls. Natural disasters. Diets. Surgery and prescription drugs. Home energy audits. Watching three to six of your friends save thousands of dollars in home energy costs doesn’t diminish the validity of doing the same thing, so why does it diminish the appeal?

Novelty is one of the persistent forces in economics, influencing decisions large and small, yet often going unrecognized by buyer and seller alike. The lack of recognition leads to excessive investments in things whose appeal is about to wear off. Five years ago it was outlet malls, SUVs, and blogs. Today equally misguided investments are being made, but it is hard to spot them because it is not so easy to realize the way our view of something is influenced by the novelty effect.