The noted economist on Yahoo!’s ad science, trends to watch for, and being funny
“I’m considered pretty funny for an economist,” quips Yahoo! VP and Senior Research Fellow R. Preston McAfee. “But to most people that’s like being tall for a dwarf.”
As evidence, he points to a spoof paper he once had published in the American Economic Review. “American Economic Growth and the Voyage of Columbus” is a real knee-slapper. That is, if you’re bright enough to see the joke in:
But that’s all fun and games---or maybe fun and game theory. At Yahoo!, the 54-year-old Econ Ph.D (Purdue) heads up the microeconomics and social sciences group, or MESS. (When a coworker complained that MESS seemed like an undignified acronym, McAfee replied, “You work for a company named Yahoo! You want dignified, work for IBM. You want fun, work for Yahoo!” Now are you seeing the humor?)
At MESS, McAfee and his team work with groups throughout Yahoo! applying highly advanced mathematical modeling (ninth grade calculus this ain’t) to help develop better, more measurable and more targeted advertising technologies and user-facing products.
The author of nearly 100 articles and two books on economics was interviewed earlier this year by The Register, where he revealed some of his “magic formula” for helping Yahoo!’s advertisers more precisely choose their targets, even in a digital universe of more than three trillion possible targets. Yahoo! CEO Carol Bartz wears the formula on a sweatshirt.
The Yahoo! Advertising blog caught up with McAfee last week.
Yahoo! Advertising Blog: You head the MESS unit at Yahoo! Research. Tell us a little about what your team does for Yahoo! and its advertisers.
R. Preston McAfee: It is a mixture. In Sponsored Search, we were the designers of quality-based pricing. In display, we were responsible for the economics behind the pricing engine and the “magic formula” that guides the new "IMS" system, one of Yahoo!’s display ad serving platforms. In advertising, we do experiments that help advertisers assess the value they receive from display ads, and are involved in the new Hyper-Local advertising product. We also invented a Yahoo! Messenger plug-in named Zync that enables real-time video sharing, and we are building a sequence of games that reflect economics and game theory.
YAB: In the article in The Register, you mention “economics as an engineering discipline,” saying that it uses “scientific principles to actually make markets or interactions among people work better.” Can you give an example of how your team has put the theory into practice?
McAfee: Sure. For market reserve pricing, we used the methodology derived by Nobel Laureate Roger Myerson to predict the optimal reserve and the advertiser response. Myerson’s analysis let us predict in advance how much money we would make for various reserve prices and set reserve prices (minimum bids) intelligently. Our approach let us make more money and give our users a better experience, without harming our advertisers.
YAB: With regard to ad networks, what are some of the chief trends that you’re seeing in the market---trends advertisers need to know about?
McAfee: Measurement is a big trend. The Internet enables much better measurement than is available in television, radio or newspapers, and display advertisers are becoming increasingly savvy at measurement. Targeting is getting extraordinarily fine and we aren’t far away from personalized ads. Demand-side platforms are booming; advertisers have a great need to simplify the buying process, perhaps because of the increase in measurement and targeting. Advertisers are talking a lot about social advertising, getting your friends and neighbors to recommend brands. In spite of these trends, however, brand advertising still emphasizes an emotional connection to the customer, just as it did a hundred years ago.
YAB: In your opinion, has social media changed the digital advertising landscape?
McAfee: Not yet. Social media creates a great many pageviews, but a demonstration of the effectiveness of ads on social media is missing. If social media prove effective---either by personalized targeting or by recommendations through your social network---we’ll see a major shift.
YAB: You mentioned Roger Myerson. What other economists/thinkers do you admire, and why?
McAfee: I’ve learned a huge amount from so many people. I often find myself quoting Paul Milgrom, a brilliant Stanford economist. I’ve used at least a dozen insights I got from Paul in my role at Yahoo!, and Paul served as a consultant to Yahoo! a few years ago. His advisor, Bob Wilson, is another Stanford economist who arguably is the first visionary to see that economics could be used as an engineering discipline. He invented some of the tools, and his Ph.D. students invented a lot more. Wilson also recommended me for the job I hold at Yahoo!. I also recommend that everyone read Thomas Schelling’s “The Strategy of Conflict,” an early game-theoretic analysis of the interaction of nations, especially the U.S. and USSR. The problems of business and the challenges of nations have many similarities, and Schelling’s insight is without peer. Finally, my friend and co-author, the late John McMillan, taught me more about markets and incentives than anyone else. His book, “Reinventing the Bazaar: A Natural History of Markets,” is a must-read for anyone interested in markets and market-making.
--- Michael Mattis