Crypto and Consumer Choice: Q&A with Giovanni Compiani
Professor Compiani shares insights from his research on cryptocurrency demand, investors’ beliefs, and consumer behavior.
- September 24, 2021
Giovanni Compiani joined Booth’s faculty in 2020 as assistant professor of marketing. His research primarily focuses on industrial organization and quantitative marketing, with an emphasis on applying frontier econometric methods to analyze markets and inform policy. Some of Compiani’s research relies on data provided by the Kilts Center for Marketing, which supports innovations in Booth’s marketing curriculum and facilitates faculty research through data set access and corporate partnerships.
In Spring Quarter 2021, he taught the Marketing Workshop, a course designed for PhD students interested in exploring and debating the field’s latest research. Prior to Booth, he taught at the Haas School of Business at the University of California at Berkeley. He studied economics at Bocconi University in Milan, Italy, before going on to earn an MA, an MPhil, and a PhD all in economics at Yale University.
Recently, he participated in a tweet chat with Chicago Booth to share key insights from his research on consumer choice and cryptocurrency. Read an edited version of the conversation below.
Chicago Booth: Why is data analytics so important for impactful marketing strategies?
Giovanni Compiani: Marketing is about understanding what consumers value and using this to optimize the way products are designed and sold. In the past, we didn’t have a lot of data on consumer choices and had to rely more on intuition (and sometimes fairly arbitrary assumptions).
Now, companies routinely have access to huge datasets on consumer choices, which allows researchers to understand consumer preferences much better. Better analytics then translates into better strategies and more value creation.
However, big data alone is not sufficient. We also need the tools to analyze it. This is where analytics comes in. It’s a way to blend statistics and economic intuition to harness the power of the data.
Booth: In a recent paper, you explore whether or not consumers are informed about the products they purchase. What did you discover?
Compiani: In a joint paper with Yale’s Jason Abaluck and I demonstrate that it’s possible to use data on consumer choices to uncover which product attributes consumers were aware of when making their choices.
For example, it might be that people shopping on Amazon always pay attention to the average star ratings, but not always to the number of 1-star ratings. It’s similar for other attributes that are not immediately visible to consumers.
Being able to tell which attributes consumers pay attention to has implications for marketing strategy. In the example above, if you are selling a product that has an OK average star rating but very few 1 stars, then you want to find a way to highlight the latter more.
More broadly, we know that consumers are inattentive in a wide range of settings, including when it comes to high-stakes choices such as insurance and housing. Our next step is to apply our methodology to the field and provide recommendations for marketers and policy makers.
Booth: What can marketers learn from your research on consumer choices?
Compiani: That the increasing availability of data can be leveraged to better understand the nuances of consumer preferences and, in turn, make better strategic choices. This requires combining the data with appropriate statistical tools and economic intuition.
In my research, my coauthors and I developed a few methods that aim to achieve just that. We are now working on applying these tools to concrete marketing questions such as pricing.
“The increasing availability of data can be leveraged to better understand the nuances of consumer preferences and, in turn, make better strategic choices. This requires combining the data with appropriate statistical tools and economic intuition.”
Booth: You’ve also researched how investors’ beliefs affect cryptocurrency demand and prices. What did you discover?
Compiani: In a joint paper, UC Berkeley’s Matteo Benetton and I find that investors tend to have quite heterogeneous beliefs about the future of cryptocurrencies. This affects their portfolio decisions and, in turn, the prices at which cryptocurrencies are traded in the market.
We find that investors who are younger, have lower incomes, and started trading cryptocurrencies during the 2017–18 boom tend to be overly optimistic on the future trajectory of cryptocurrency prices.
Booth: Crypto is a favorite among younger investors. What are your thoughts on the boom in speculative assets post-pandemic?
Compiani: We use data pre-pandemic, but our results are in line with patterns that have emerged in the past year and a half. As I mentioned, less-experienced investors tend to be overly optimistic. This suggests that the risk of bubbles might increase as more people have access to trading, maybe via platforms such as Robinhood. During the pandemic, more and more people started trading assets out of boredom and excess savings. This led to bubbles, as with GameStop.
Booth: How did your research on consumer choice inform your research on crypto? What is the connection between the two?
Compiani: In the crypto research, we think about investors choosing among cryptos very much like consumers choosing among products. The tools that are commonly used to understand consumer choices can be applied to studying investor choices as well.
Each crypto has a price, an expected return, and other features, such as its privacy level or energy intensity. Investors trade off these attributes against each other when optimizing their portfolios.
Booth: With thousands of cryptocurrencies available, how can investors decide which are the best to invest in?
Compiani: There are many factors at play, but one that seems crucial in the medium to long run is sustainability. Some cryptocurrencies, such as bitcoins and ethers, validate transactions using a protocol called proof of work, which consumes huge amounts of energy. This process currently consumes as much energy per year as all of Poland!
This has environmental impacts and also can affect local economies via higher electricity prices, as I document in a paper with Benetton and Adair Morse of Hass. As governments become more aware of these issues, one would expect more restrictions and taxes imposed on these cryptos.
Other cryptos, such as XRP, don’t require as much energy and so seem more promising from this point of view.