Bezos Amazon and Certainty Effect

Memo: Amazon Empire the Rise and Reign of Jeff Bezos

Subject: Behavioral Game Theory, Active Choice Bias, Certainty Effect, and Altruism

The CTMs applied in the case of the rise and reign of Jeff Bezos are behavioral game theory, active choice bias, certainty effect, and altruism.

Game theory is an analytic method that helps to study decisions, interactions and strategies in a variety of economic, political and social contexts. Researchers in this area analyze ‘games’ such as chess or poker by bringing together the principles associated with group behavior through the mathematical concepts of probability and decision theory. It is important to understand how particular outcomes can emerge given different rules and subsequent personal choices. Game theory encourages an interdisciplinary approach by combining economics, mathematics, psychology and computer simulations. While often used in game show environments, it has implications beyond entertainment; leading economists have argued that insights from game theory could provide better solutions for a wide range of real-world collective pursuits including environmental and public health issues.

The phenomenon of active choice bias is a cognitive bias in decision-making that occurs when individuals rely on their initial choices, even if the specific elements of the choice change over time. This is most often seen in consumer preferences, such as preferring a particular brand of computer or phone after buying it. It can also be seen in situations where individuals feel they have made an active choice, such as when choosing jobs or apartaments. Active choice bias is distinct from commitment bias, which affects decisions made by groups and can be triggered by investment of social capital or resources. Both phenomena can create potential consequences for decision-makers and those involved. As such, understanding how to address and mitigate active choice bias is critical for making well-informed choices and ensuring successful outcomes.

The certainty effect is an economic concept related to decision-making that suggests people are more likely to make a choice if the outcome of selecting that option has a known result. This phenomenon, which is also called the known-unknown effect, occurs when there is either complete certainty or uncertainty regarding the input and output associated with decision-making. It has been observed in multiple settings, from investors' decisions to allocate funds to firms making marketing investments. The certainty effect has been used to study human behavior and explain both individual and collective decision-making. It is also valuable for understanding how people evaluate potential options and assess potential outcomes, as well as for identifying ways to make better decisions in uncertain environments.

Altruism is a concept that is commonly described as an action or behavior that benefits another person while not providing any benefit to the actor themselves. For example, donating money to charity or taking time out of one's day to help a stranger would both be considered altruistic acts. Humanitarianism and self-sacrifice are values associated with altruism. Over the decades, theories examining why humans practice altruism have been proposed; evolutionary psychology suggests it's an evolutionary trait while social preferences theory suggests it's related to rewards of recognition.

The initial aim of Bezos with Amazon was to develop a centralized interface on the internet to sell books to consumers at a fair price. Bezos intended Amazon to become the leader in online retail. Bezos hired independent driving companies, and introduced a new business model to keep customers happy and make profits, while simultaneously controlling how the media portrayed Amazon. Bezos purchased the Washington Post, strategically entered the A.I. space, and worked with the U.S. Government and local police. Bezos purchased Ring security company and entered the grocery space.

The concepts at play in the rise and reign of Bezos occurred at the intersection of various decisions, starting with the decision on whether take short term profits or not take short term profits. The CTM at play here was certainty effect. By not taking short term profits Jeff Bezos was able to use money to build his growing business. The certainty effect theory highlights the notion that entrepreneurs are more likely to take a firm decision if they feel certain of the positive outcome, even if they have to make sacrifices along the way. Jeff Bezos is an excellent example as his bold decision of not taking short term profits gave him access to additional assets that he has been able to use in order to grow his business into what is currently one of the most successful companies in the world. Thanks to his vision and determination, he has been able to reach great heights, setting the bar high on dreams and goals for other entrepreneurs across multiple industries.

The second decision Bezos faced was whether to negotiate fees with publishers to sell their books or not negotiate fees. In their decision to negotiate fees with publishers to sell their books, Amazon and its founder Jeff Bezos demonstrated an altruistic approach. It was made clear that Amazon would dedicate the resources necessary to ensure the publisher’s success and profitability. Although Amazon was an upstart company at the time they made this decision, they were willing to sacrifice short-term gains in order to create long-term relationships and trust with their publishers. This decision ultimately laid the foundation for Amazon’s current status as a titan of e-commerce.

The third decision was whether to build fulfillment centers/don’t build fulfillment centers. Jeff Bezos’ decision to build new fulfillment centers for Amazon demonstrated active choice bias. This type of bias occurs when individuals are presented with a limited number of options but are still able to make a clear-cut choice. In the case of Amazon, this meant building as many fulfillment centers as possible in order to keep their prime members happy with their delivery and shipping timelines. There was no other choice for Bezos given the circumstances if he wanted his customers to remain content amid the company's rapidly growing online presence.

The fourth decision was whether to Hire Independent Driving Companies/Don’t Hire Independent Driving Companies/ Train in-house drivers. Jeff Bezos' decision to utilise independent driving companies when facilitating deliveries from his Amazon store was driven by a desire to minimise risk. This can be seen as an application of game theory; a discipline which seeks to understand how behaviour is influenced by one's incentives and beliefs about the other players involved. By doing so, Nexus is able to reduce the costs associated with screening, training, managing and paying in-house drivers. It also opens up opportunities for Amazon to leverage existing operations in specific geographical areas or contexts which then allows the company to rapidly scale its operations without incurring additional costs or time. Consequently, it can be surmised that Jeff Bezos’ decision was driven by strategic thinking rather than arbitrary reasoning.

Bezos demonstrated each of these CTMs in other ways as well, for example, he showed the certainty effect in the decision to allow private sellers to do business through their e-commerce website allows Amazon to grow at a rapid rate. By applying the Certainty effect, Jeff Bezos was able to maximize Amazon's success potential. By introducing the ability for private sellers to utilize the Amazon platform and do business via their e-commerce website, Bezos could quickly benefit from added user traffic and growth. This strategy allowed Amazon to become a global leader in digital retail, competing on an international stage while maintaining a steady foothold in the United States. Ultimately, this decision opened up a realm of possibilities that no other company had considered prior; so it is safe to say that Bezos was an innovator far ahead of his time.