Have you ever found that perfect hotel for your holiday online, only to click on it and find out you MUST BOOK NOW as they only have 2 rooms left? Of course you have- we’ve all been there.

Consumer products and media companies are well aware of human psychological frailties… and have been for decades.  This is a great video that highlights some of the techniques that are commonly used to exploit us (Kate Cooper: The Secrets of  Food Marketing).  Cleverly worded phrases to mislead us, techniques to make us believe that what we’re seeing is positive progress, and that mixed with our own willingness to be ignorant allows us to be exploited. Technology circles refer to these processes as “dark patterns”; there’s even a website devoted to uncovering the practice (Dark Patterns Hall of Fame). 

Consumers are increasingly aware of nefarious online practices and are beginning to ask the questions….

  • What do these platforms know?
  • What value am I giving away?
  • Is my “free” access to this platform worth that cost?

It is very hard for consumers to answer these questions and perhaps they will continue to wilfully ignore them… indeed Facebook and Instagram user data suggests as much. However, it is evident to us that bad practices eventually damage the strategic power of a business. Unsustainable practices are a form of long-term market friction that will eventually be discounted in share prices.  Frictions encourage regulation, slow growth or encourage disruptive competitors to arbitrage the incumbent’s unwillingness to change. As investors, the emergence of such strategic risk should (all else equal) lead us to change our view. For example, whilst we can still see positive social merit in social media platforms, we are now increasingly wary of the negative impacts and thus potential erosion of their strategic power. After all, the social impact of a social network is strategically important to them… the clue is in the name!  A recent example which has reached its ‘end game’ is fixed odds betting machines. These allowed people to ruin themselves financially for the dopamine rush of a fixed-odds bet reward.  This profiteering practice was unsustainable and has largely been regulated out of existence in the UK. Betting shops are now being closed with the ultimate cost evident in both job losses and falling share prices.

The ultimate tonic is transparency. Whilst consumers can be somewhat forgiven for being “wilfully ignorant” (as Kate Cooper explains), this makes us reflect on whether active investors should be doing a better job of identifying these unsustainable “dark patterns” when analysing companies. Why? Because being wilfully ignorant to negative second-order impacts doesn’t just damage society or the environment… it damages long-term shareholder value too.

About the author

Jonathan Parsons is an Investment Manager in the Equities team with responsibility for North American equities. He also manages a global technology portfolio and contributes to the idea generation process for our global equity portfolios. Prior to this, he worked as a Quantitative Analyst, also in the International Equities team. Jonathan joined us in 1996 straight from university and has 23 years’ industry experience*. Jonathan studied Mathematics & Computation at Loughborough University of Technology and is a CFA charterholder. *As at 30 April 2019.

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