How humans make decisions, and how that affects cloud computing

As a cloud economist at VMware, I think a lot about the process of how humans make decisions. In previous articles, I have written about how economics evolved, in a larger sense, with the arrival of behavioral economics. There has also been framing devices used in the teaching of economics. For example, from the 70s to the 90s, that framing was around incentives, and how humans can react to incentives. The rise in popularity of behavioral economics was evident by the end of this period.

More recently, Freakonomics was a hugely successful popular book on economics, and real-life examples (some controversial) of how people made decisions, often affected by biases and blindspots. It also has a companion podcast, hosted by one of the co-authors, Stephen Dubner.

About halfway through a recent episode of the Freakonomics podcast, The Downside of Disgust, there was a discussion about a behavioral economics experiment that sought to determine what monetary incentive would encourage college students to eat bugs. I definitely recommend you listen to this part and how the experiment is structured.

The major hook of the podcast is that eating bugs provide a major source of non-carbon polluting protein. This episode focuses on Paul Rozin, a professor at University of Pennsylvania, who is an advocate for eating bugs as a means to limit carbon production, limit climate change, and limit world hunger. He points out that some cultures already factor this in, like the indigenous people of Oaxaca, for example. (Travel hint: You can get a nice plate of sauteed grasshoppers, called chapulines, at San José restaurant Mexcal. I recommend the experience.)

After describing the experiment mentioned above, and the incentives, Rozin makes an interesting point: Incentives can cause the opposite behavior of what you are trying to elicit. He mentions that with incentives, sometimes a person is less likely to try something after the incentive is removed. This made me realize that one needs to be very careful when designing incentives into a system. In short, incentives almost always have good and bad effects, or put another way, intended and unintended effects.

Our Cloud Economics group here at VMware resides in a larger marketing organization. Since we’re in a marketing organization, we deal with incentives quite a lot. We deal with pricing, promotions, and incentives for our sales teams. We have seen this internally. If you set up incentives for sales to sell one thing, they will sell it. However, the amount of money our customers have is limited, and creating incentives for one thing means other things will not get sold. So, one has to be careful about the structure and side effects of incentives.

VMware’s cloud economics approach

What does this have to do with how we talk about economics? It’s part of a larger framework for how to think about the decisions you make, and especially the decisions you make about your cloud computing environment. It’s becoming clear to me that when making a decision on cloud, you need to be aware of three things:

1. Your own biases.
2. A frank evaluation and valuation of the risk of your project. Craig Stanley has written about this extensively.
3. The incentives in the system in which you are operating.

In understanding these three areas, you should be able to make better decisions when looking to move part of your IT infrastructure to the cloud. Request a Cloud TCO from us at vmc-econ-submissions@vmware.com, and we’ll show you how we can help you with a total cost of ownership analysis.