No, You Can't Value Facebook At $1,000 Per User
Published in Online Spin, December 21st, 2018
It’s a study perfectly designed for the headlines: researchers at Tufts University paying people to walk away from Facebook.
Using auctions to determine the true market price, three groups of researchers paid people to deactivate their accounts for a day, three days, a week and a year. The average bid for a year? Well over $1,000.
If that bid is an indication of Facebook’s value… buy now. Multiplying the average bid by the number of users yields a total that is many times higher than Facebook’s actual market capitalization. (Note: this column is absolutely, one hundred per cent, not a source of investment advice.)
Of course, multiplying the average bid by the number of users would be an almost unbearably ineffective way of calculating the value of the company. All three studies were in the U.S., and two out of three were in Midwestern towns. But economic circumstances vary wildly, both within the U.S. and globally, and only 214 million of Facebook’s 2.2 billion users are in the U.S.
There are plenty of other reasons why the studies shouldn’t be used as an indication of company value. Instead, they’re more of an intriguing look into human behavior—and, based on a number of common, irrational behavioral phenomena, probably tell even less about the value of Facebook than you might think.
Take the well-documented phenomenon of humans placing significantly more value on what they currently have than on what they don’t yet have. People always want more to sell their car than they would be willing to pay for it.
Or take loss aversion: “Behavioral economist Dan Ariely adds a fascinating twist to loss aversion in his book, 'Predictably Irrational.' He writes that when factoring the costs of any exchange, you tend to focus more on what you may lose in the bargain than on what you stand to gain. The ‘pain of paying,’ as he puts it, arises whenever you must give up anything you own…
“In one of his experiments, Ariely set up a booth in a well-trafficked area. Passersby could purchase chocolates—Hershey’s Kisses for one penny a piece or Lindt Truffles for fifteen cents each. The majority of people who faced this offer chose the truffles. It was a fine deal considering the quality differences and the normal prices of both items.
“Ariely then set up another booth with the same two choices but lowered the price by one cent each, thus making the kisses cost nothing and the truffles cost 14 cents each. This time, the vast majority of people selected the kisses instead of the truffles. If people acted on pure mathematical logic, explained Ariely, there should have been no change in the behavior of the subjects.”
With the Facebook studies, people were focused on what they were losing—access to their online social life and to all the connections they’ve nurtured over time. If you were to flip the study, though, and ask how much people would pay to stay on Facebook, Ariely’s work suggests that people would switch focus—away from what they get by being on the social network and toward what they would lose: their hard-earned money.
The studies are interesting for sure. But, as I said, don’t go buying any shares because of them.