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Prediction Machines: The Simple Economics of Artificial Intelligence by Ajay Agrawal, Joshua Gans, Avi Goldfarb
What if your business could predict what your customers want, before they tell you?
Published by Harvard Business Review Press in 2018, Prediction Machines is clearing some of the hype around AI and showing it to be a technological evolution that can be immensely useful when applied for customer strategy..
What does AI mean for your business? Read this book to find out.
Hal Varian, Chief Economist, Google
The authors are economists. They see AI as a tool that lowers the cost of prediction. Many of the ‘big tech’ organisations including Google, Alibaba, Tencent and Amazon are already ahead of the curve in their use of predictive AI and it is embedded in their business model.
Most of you will be familiar with Amazon’s recommendations on books they believe you will like. I bought Prediction Machines a while ago and they are now recommending ‘Human + Machine’, ‘Good Strategy/ Bad Strategy’, ‘Measure What Matters’ (image below). These recommendations tell us something about the kind of books I already buy and what Amazon believes I will like based on the purchasing behaviours of other people like me. It is predicting what I want to read. Quite well actually. ‘Human + Machine’ is definitely on my Christmas reading list. Strategy and productivity books are also relevant for me. The data suggests Amazon recommendations are right 5% of the time (Agrawal et al 2018). Which seems low (it has a huge impact in terms of profit for the business), but imagine when that accuracy improves.
The authors of ‘Prediction Machines’ suggest the next step for Amazon could be preemptive selling. Amazon could start to send you books, or other products, that it believes you will want - before ordering them. Part of the business model could change from ‘shopping then shipping’ to ‘shipping then shopping’. If Amazon had already sent me ‘Human + Machine’ I probably would have kept it. I wouldn’t have wanted the other two right now. This has a raft of delivery and returns changes that would affect the model. The authors walk you through more of their thought experiment - but you get the gist. This is a step change in customer strategy. And it’s coming soon.
The authors of ‘Prediction Machines’ suggest the next step for Amazon could be preemptive selling. Amazon could start to send you books, or other products, that it believes you will want - before ordering them. Part of the business model could change from ‘shopping then shipping’ to ‘shipping then shopping’. This has a raft of delivery and returns changes that would affect the model. The authors walk you through more of their thought experiment - but you get the gist. This is a step change in customer strategy. And it’s coming soon.
Some AIs will affect the economics of a business so dramatically that they will no longer be used to simply enhance productivity in executing against the strategy; they will change the strategy itself.
Prediction Machines
I recommend readers in the C-Suite head to Chapter 15, which gives an excellent overview of the implications for AI in strategy design. Uncertainty is the enemy of good strategy, and AI is designed to reduce the unknowns inside your organisation. It will also give you insights to help consider how you might more effectively use the technology you have already embedded in your organisation.
Sarah Daly is undertaking a PhD at the Queensland University of Technology, investigating the role of trust in the adoption and diffusion of AI based innovation, particularly in the healthcare sector. She is also the Operations Director of CapFeather, a customer strategy and innovation consulting firm.