Hello, and welcome back to Networks IIllustrated: Principles without Calculus. Today, we're going to look at the question, when can you trust an average rating on Amazon? So when you go to Amazon, you look at a product. You're going to see that it has an average rating attached to it. And the idea is, when can you trust that this is something meaningful? Which is going to beg the question of, how is that computed? And what factors go into its computation? In looking at this question, we're going to see the principle, Crowds are Wise, come up, which is a restatement of the concept, wisdom of crowds. Wisdom of crowds. Which is the idea, that under certain circumstances we can trust the opinion of the masses. We can leverage their opinions in estimating some value of some task. And so for instance in estimating the person's weight, if we have everybody submit a guess as to what that person's weight is after taking a look at the person, we can average them out and under certain circumstances we're going to have a pretty good estimate in that average of what the person's weight actually is. Even if the, everyone in themselves is not very good at making the estimate, the average will cancel out all the quote unquote noise in that estimator. But unfortunately, in many practical circumstances, such as computing an average rating on Amazon the assumptions that we need in order to have that happen, where the wisdom of crowds actually works and comes up with a very meaningful estimate, are going to break down. And so it's not always going to work out. Just to give ourselves some background behind this, let's take a look at e-commerce which is the part of the marketplace where Amazon fits in. So, today much of our shopping is done online. And so every year a larger fraction of the amount of shopping that we do is done online as opposed to in person, or brick and mortar. By 2012 for instance the U.S. e-commerce had a net revenue greater than $225 billion. So the dominant e-commerce company today, Amazon was founded in 1994. Initially Amazon had slow growth, which is the results of their business model, which is a pretty unusual business model that they didn't want to have or they didn't expect to see any revenue for the first four or five years that they were in operation. But they were actually one of the only e-commerce companies that survived, when the dot com bubble burst, around 2000. And, for those of you who don't know what the dot com bubble is, basically, from the period of 1997 to 2000, there was a lot of internet, there was a lot of economic growth, around the internet, as the Internet expanded, more and more into commercial venues. And so a lot of businesses that were built around the internet start to see a really large increase in their stock prices and the amount of equity that they could get. And so as a result a lot of them started to have much more rapid expansion. Because, you know, they saw a lot more money coming in. But then once the, once the bubble burst and their stock prices started to go down, a lot of them ended up going out of business or at least losing a large part of their market share, but Amazon didn't. Amazon stayed alive and today it's the worlds largest online retailer. So it's, pretty remarkable. So we can look at the difference between brick and mortar and online retailer. And basically brick and mortar is just in person, right. So you, you got to some place, you go to some retailer and you buy a product in person. As opposed to online when you just buy it online and it gets shipped to wherever you are. The former, in lots of cases, is expanding at the latter. So, many brick and mortar retailing businesses are starting to open online segments, because, they want to stay competitive. As the amount of online shopping that we do becomes larger and larger portion of the total shopping that we do. And, so a good example of this is Wal-Mart actually, which is probably the largest face-to-face retailer in the world, and this is probably the second largest online retailer in the world as well. So, this, this chart here shows the online market shares for electronics only in, Q4 of 2011. But just to give you an idea, you see Amazon is 60% of that where as Wal-Mart only has 22%. So, Amazon is greater than the second largest market player, for online electronic sales by over double. So it's over double the size in terms of market sales, at least in Q4 2011. And so as a lot of these brick and mortar retailers open online stores, you can't see, the distinction between them is starting to blur more now. Where as originally there was there was a very fine line between the two. Now many brick and mortars are opening up these online retail spaces as well. [BLANK_AUDIO]
