It’s all up in the stars.
Given the intractable — and exasperating — debates regarding the “fiscal cliff” or “fiscal ledge” or “fiscal nightmare” (take your pick), this columnist decided that any “fiscal nuclear scenario” discussion could wait another two weeks.
Anything to take one’s mind off self-centered politicians who play Russian roulette with our economy and the financial health of millions of families across the country.
A nice reprieve might be scheduling a fancy dinner. Of course, these days — as with so much else — people rely more and more on apps to help them decide what restaurant to patronize.
One of the more prominent applications for comparing restaurants and other services is “Yelp.com,” which means that it is also a treasure trove for economists attempting to study the impact of the virtual word-of-mouth on business.
You may have seen stories of lawsuits against disgruntled customers by businesses, which pit free enterprise principles against fundamental free speech rights. (Examples can be found at: http://bit.ly/XmPjmT and http://abcn.ws/UsiT9o.)
While the courts will figure out where the boundaries lie that cannot be crossed when airing one’s grievances for an audience of potentially millions of people, another questions being asked is how to better harness the wisdom of the crowd.
Two recent papers looked at the impact of review websites, as well as how to improve the “averages” that visitors of those websites will be presented with.
The first study by economist Michael Luca attempts to quantify the impact of ratings on revenues. In his analysis (available at: http://bit.ly/RtPDUj), the Harvard Business School professor combines data from Yelp.com and from the Washington State Department of Revenue to investigate how much posted ratings influence consumer demand.
He presents a number of striking results, among them that “a one-star increase in Yelp rating leads to a 5-9 percent increase in revenue … and [that] chain restaurants have declined in market share as Yelp penetration has increased.”
Given those significant impacts, business and review websites themselves would probably want the “averages” presented to be as correct as possible. Another paper by a team of economists addresses that very question. It is titled “Optimal Aggregation of Consumer Ratings: An Application to Yelp.com” and tests how accurate current average ratings are when a number of reviewer characteristics are accounted for.
They have information on a given reviewer’s average rating (some reviewers tend to be more critical) and on his or her tendency to be “influenced by existing reviews,” as well as on observable quality changes of the reviewed service itself.
Taking all of this into account, the authors construct what they call an “optimal rating for all restaurants on Yelp.” They conclude “that roughly 25-27 percent of restaurants are more than 0.15 stars away from the optimal rating, and 8-10 percent of restaurants are more than 0.25 stars away from the optimal rating.”
This can have a strikingly significant impact on the average business.
One advantage that their system seems to have is that it is better able to react to changing service quality than the “average” on a review website.
If only we could apply this kind of crowd wisdom more consistently to politicians. Perhaps, then, we could decrease the average number of “crises” that we experience because of partisan gridlock.
I would give five stars for that.
Dr. Michael Reksulak teaches economics and public finance in Georgia Southern University’s College of Business Administration. He may be reached by email at mreksula@georgiasouthern.edu.