Why you should care about the rising economy of algorithms

Three reasons why it might change your life.

In 2016, a Reddit user made a confession. FiletOfFish1066 had automated all of the work tasks and spent around six years “doing nothing”. While the original post seems to have disappeared from Reddit, there are numerous reports about the admission. The original poster suggested that he (all the stories refer to FiletOfFish1066 as male) spent about 50 hours doing “real work”. The rest — “nothing”. When his employer found out, FiletOfFish1066 was fired. I think this is the worst mistake an employer can make. He should have been given a pay rise. But that’s a topic for another article. Let’s talk about hiring algorithms to work for you — just like FiletOfFish1066 had a bunch of algorithms working for him.

If your employees automate their tasks to “do nothing”, don’t fire them. Give them a pay rise, and learn from them. They will show you how to scale your business.

Algorithms don’t simply power applications, scripts, or automate tasks in other ways. Increasingly, they become our personal agents and make decisions on our behalf. For instance, Boston-based Quantopian, an investment firm focussed on crowdsourcing, allows people to submit simple algorithms that then make fund allocation decisions on behalf of investors. The algorithms are not yet as simple as Siri Shortcuts, but even beginner programmers should be able to write simple Quantopian algorithms. Imagine hundreds or thousands of such algorithms, each of them having access to information provided by quantopian, deciding what to do with their creators’ money. It is not science fiction; it is happening right now. An army of algorithms is continuously deciding how to allocate the funds.

Have you hired an algorithm recently?

When algorithms make decisions on our behalf, when they interact with other organizations, make purchases, order services, or arrange meetings, they are acting as our economic agents. An economic agent is an actor or decision maker in a model of some aspect of the economy.

Remember the “old” economy, where large corporations were the most important? It is not going anywhere just yet. However, a new economy — the economy of people — has emerged right next to the economy of corporations in the past twenty years. It has given individuals unprecedented opportunities to participate in the global value creation and exchange. While we marvel at the economy of people, another economy, the economy of algorithms is emerging. In this new economy algorithms and devices with algorithms running them (for instance robots), become economic agents. They take an active and often independent part in economic value creation.

Three developments have been crucial for the emergence of the economy of algorithms: Internet of Things, Algorithms, and Business Models.

Internet of Things + Algorithms as economic agents + Business Models = Economy of Algorithms

The Internet of Things

The vast networks of electronic devices, connected and exchanging data, create what we call the Internet of Things (IoT). IoT helps in data collection, distribution, monitoring, prediction of trends and so on. But most importantly (for us, that is), it helps connect all of the devices we might have. We can think of IoT as the pipes, through which data can flow in all directions, between all devices. Even though some vendors would prefer us to think that IoT is mostly about the devices at the end of the pipes (sensors, servers and so on), the network — the pipes — is what matters.

Algorithms as economic agents

Pipes themselves do not create value. Only when we use the data flowing through the pipes, and use it smartly, we create value. This is where algorithms that act on our behalf can step in. An intelligent sensor in my car, connecting its engine computer to my mobile phone and Automatic’s servers, can now inform my mechanic if there’s a trouble with my engine, or arm my home’s alarm when I leave. I wrote a simple script — an algorithm — that does that. Koola experimented with the use of predictive algorithms to offer “service opportunities” to dealers (that is: car X may break soon). Would you believe your car mechanic if they were telling you that you need to fix your car because it is going to break soon? Which takes me to the third component.

Business Models

Interconnected devices and algorithms creating value are great, but without business models, they are just a fun exercise. The rubber hits the road when economic value is created. And in the case of tracking car data, there are more and more business models worth paying attention to. The U.S. insurer Progressive offers Snapshot. The service requires drivers to install a sensor, similar to Automatic’s one, in their cars. Then Progressive reduces or increases your insurance premiums based on the data coming from the sensor. Thinking about flooring it? It may cost you your premium discount! The new insurance model (business model) has a name now: black box insurance. Oh, and Koola? Their twitter feed has been quiet for over a year now. Perhaps their business model wasn’t that great?

Why should you care?

1. The economy of algorithms can make you rich(er)

Yes, you can already save on your insurance premiums. But there’s more to come. As technology advances, your devices and algorithms will be able to generate income actively (yes, you may already have solar panels that sell energy back to the grid, but they’re entirely passive in what they do). In future, your home could know that your garage is going to be empty for the next eight hours, and offer this vacant spot to a self-driving car driving past, looking for a secure place to stop at for a while. Unlike many humans, algorithms do not see much difference between parking at a large, multi-story, well-advertised car park, and a single spot in a private garage two blocks away. If the preference function of a car gives priority to cheaper parking spots, and the private garage is less expensive than the commercial one, the car will take the private one. No questions asked. So, let your home management algorithm check your calendar, advertise the spot, open and close the garage door automatically, and receive a micro-payment from the car on your behalf.

There are algorithms out there that can save you a few bucks! And if you have enough control over them, it might make sense to hire them.

And speaking of solar panels: the algorithm running your home may decide to not send the energy back to the grid during the day, but instead offer a pop-up charging station for electric cars nearby, using a wireless charging mat in the driveway, the one you usually charge your vehicle with. Using the network (IoT), your algorithm will be able to advertise the charging station and perhaps automatically bid, assuming other houses might want to sell electricity too. Sounds sci-fi? It should not. Services like Parkhound are already available for humans. It is a matter of time until they develop APIs for algorithms.

2. You will be making fewer decisions

Just like FiletOfFish1066 wanted to spend less time on repetitive tasks, many of us try to minimize the number of choices we make every day. Some call it choice minimalism, I call it convenience. I do not want to be making every single purchasing decision in my household. Toilet paper, milk or getting LPG containers replaced? I would love to remove the burden of remembering to make these purchases.

Almost two years ago Michael Rosemann, Paula Dootson and I published a report on the future of retail: Retail 5.o. In the publication, we argue that “convenience shopping” (as opposed to “experience shopping”) is going to be reduced by technology to a minimum. In other words, algorithms will take over a lot of such decision making. Jeff Bezos seems to be agreeing — experimenting with zero-click shopping, according to a story by The Times published today. And when Jeff Bezos experiments with something, there’s a good chance it may change the world.

The future of retail is no retail, or zero-click retail. And the Economy of Algorithms can make it possible.

Is it good or bad? It can go both ways. What if my fridge keeps ordering junk food to keep me “happy”? What if my home assistant sends my account into overdraft and I am hit with massive bank charges? What if my garage makes me rich? What if all the algorithms around me finally allow me to focus on finishing that book I promised to finish last year? Either way, this is another reason we should pay attention to the economy of algorithms.

3. You will need to rethink your relationship with technology

Algorithms are just instructions interpreted by computers. But, like it or not, we need to change how we think about them. In two ways: we need to start treating them the way we would treat our human economic agents, and we need to take the time to truly understand them and find out how to make them work as a team.

The first one may be a bit surprising. But have you thought about smart fridges the way you would think about shoppers? How do you advertise to a fridge? How do you ensure a Quantopian algorithm’s values are aligned with yours? These questions only seem to be ridiculous. They can reveal opportunities, or challenges, the economy of algorithms may bring.

How do you advertise to a fridge?

Getting your algorithms to work as a team? Once you will have hired a bunch of algorithms to work for you (or with you), you will likely see the value of it fairly quickly. Like FiletOfFish1066, receiving about $95k salary every year for six years. But, just like with human teams, algorithms working as a team will achieve much more. Hopefully, for you.

Whether you are just like FiletOfFish1066, looking for an opportunity to hire algorithms, or you are like his manager, looking for opportunities to keep the world unchanged, the upcoming economy of algorithms is going to keep you busy. One thing for sure, it will be an exciting time!