Zynga is getting ready to try its hand at online gambling.

The company has confirmed to All Things D that it is actively investigating several opportunities, and is in talks with several partners about gambling on the Internet.

A Zynga spokesperson provided this statement to AllThingsD:

“We build games and experiences that our players want and love. Zynga Poker is the world’s largest online poker game with more than 7 million people playing every day and over 30 million each month. We know from listening to our players that there’s an interest in the real money gambling market. We’re in active conversations with potential partners to better understand and explore this new opportunity.”

As with any new entrant in the space, Zynga will have to fulfill several requirements, meaning any major rollout is still months away.

The San Francisco-based social games maker will have to wade through a maze of state, national and international regulations. It will have to secure the correct licenses, and it also needs the right technology to make betting over the Internet secure.

For either of these last two requirements, a partnership or acquisition of an online gambling organization or other technology would make the most sense, instead of starting from scratch.

However, the effort could easily pay off.

Zynga was one of the first online gaming companies on Facebook, and continues to dominate the platform today. If it is able to get its toe in the door, just as the laws change in the U.S., it could be a leader yet again.

Back in October, Zynga first started showing broad interest in the casino category.

Zynga founder and CEO Mark Pincus announced at a press event that the company was going to launch Zynga Casino, which would serve as a single destination on Facebook to build off its strong brand in poker.

Its first new game, which has not launched yet, will be bingo.

Until now, the company’s efforts have been limited to building social and mobile games that are given away for free and monetized through the sale of virtual goods.

Getting users to make bets and part with real money could prove difficult, even for a company that has so many dedicated fans.

One thing Zynga has going for it is that social games are frequently compared to gambling because of their addictive nature — both lure consumers into spending a few more dollars to continue playing.

The casino genre has also been quietly racking up big numbers on Facebook.

Besides Zynga Poker, which is the most popular poker game on Facebook, and one of the company’s longest standing titles, there are many other sleeping giants. Sean Ryan, Facebook’s director of game partnerships, has even called them “unbelievable monsters.”

Said Ryan: “It turns out that people are completely okay winning virtual currency that they can never cash out.”

If players actually have the chance to win money, who knows the size of the opportunity?

A Facebook spokesperson said the company does not necessarily see a future for gambling on the social network. “We don’t have any plans to get into real-money gambling,” she said.

It’s unclear if that eliminates others from experimenting. In the meantime, it hasn’t stopped game makers from exploring the category or the concept.

Last week, Seattle-based Double Down Interactive, which was named by Facebook as one of the most popular game makers of 2011, was acquired by video poker giant International Game Technology for $500 million. It has 4.7 million monthly active users playing a variety of games, including blackjack, slots, video poker and roulette.

The deal closely followed Caesars Entertainment’s purchase of Playtika, an Israeli game company known for its Facebook title Slotomania. Caesars bought the company in two stages, the first of which was rumored to be purchased for up to $90 million.

Caesars, which filed to go public in November, declined to comment because it is currently in its quiet period.

However, some of its plans were revealed in a document filed with the Securities & Exchange Commission. It said its Caesars and World Series of Poker brands are dedicated to online gaming, and will take advantage of real-money gaming as it becomes legalized. Right now, Caesars Entertainment offers games “for fun” in jurisdictions where online gambling is not yet legal, but has identified the legalization of online poker in the U.S. as “the largest opportunity in online gaming in the near term.”

Still, the biggest hurdle is the law.

Internationally, several countries have permitted gambling for some time, and those areas represent the most immediate opportunities.

But there are signs of the U.S. beginning to open up, too. On the day before Christmas, the Department of Justice gave the online gambling community an early present, according to a blog post written by Nelson Rose, a professor and lawyer.

“President Barack Obama’s administration has just declared, perhaps unintentionally, that almost every form of intra-state Internet gambling is legal under federal law, and so may be games played interstate and even internationally,” Rose wrote.

Essentially, what the Justice Department did was to issue a new interpretation of the Wire Act of 1961. Under the new ruling, it interprets the act as only outlawing bets on sporting events — not all events and contests, according to an article in the San Francisco Chronicle.

With that clarification in place, it will now be up to every state to pass legislation outlining operating procedures. So far, Nevada and the District of Columbia have moved quickly to enact laws. To get other state laws passed could be a lengthy process, especially during an election year.

In the meantime, launching games only in Nevada and D.C. doesn’t represent the big opportunity everyone was hoping for.

To be competitive against Caesars and IGT, Zynga may have to partner or acquire companies that already have the licenses in place or the necessary expertise.

Some of the more obvious candidates include Bwin, which operates PartyGaming.com and is traded on the London Stock Exchange; Betfair, and other operators, like Bodog, Bet365 and 888.com. Many are based in the U.K. and handle a variety of casino games and sporting contests there.

The entrance into a new market, such as gambling, would take substantial resources, and Zynga has them thanks to its public offering. In December, it raised $1 billion, making it the largest Internet IPO since Google.

So, will Zynga be the next “unbelievable monster?” Clearly, it is willing to try.

CNBC first reported the rumor during an afternoon broadcast, but an official announcement is expected after the markets close. A Double Down spokesperson declined to comment.

UPDATE: The two companies have confirmed the transaction. The deal includes $250 million in cash, $85 million in retention payments over the next two years and up to $165 million in cash payable over the next three years subject to Double Down meeting certain targets.

As it turns out, casino games on Facebook have quietly been ringing up a pretty healthy business.

Even though gambling isn’t legal online — yet — players are still finding slots, cards and other casino games addictive. Most of the games are free to play, and of course, players don’t ever get to cash out their winnings.

DoubleDown Casino has 1.3 million daily active users and 4.7 million monthly active users, according to AppData.

While that doesn’t rank it as one of the most-played games, it is frequently mentioned as one of the most popular and could be one of the more profitable.

Facebook named DoubleDown Casino as the fourth-most popular game of 2011, based on user reviews, and in October, I reported that DoubleDown was generating $140,000 a day in revenue, according to sources close to the company.

DDI’s game on Facebook is like visiting the Las Vegas strip.

Over the past year, it has added several casino games to its app, including blackjack, slots, video poker and roulette.

The deal closely follows Caesars’ purchase of Playtika, an Israeli game company known for its Facebook title, Slotomania. Caesars purchased the company in two stages, the first of which was rumored to be sold for up to $90 million.

With both Caesars and IGT putting their hats into the social gaming ring, it’s hard not to wonder if — or when — gambling will become legal on the Internet. Clearly, they are betting that Facebook could be one of the dominant platforms where it takes off first — if not in the U.S., then maybe in one of the more than 30 countries where Double Down operates.

IGT designs, develops and manufactures gaming machines, making it a strong candidate for merging legal gambling with online efforts, especially now with the expertise of Double Down behind it.

DDI was co-founded by Greg Enell and Cooper DuBois. The two founders used the profits from a previous company, Pickjam, to fund the Facebook game start-up.

Enell will continue the company’s operations from its Seattle offices, where it has 70 employees.

Recently, I returned to San Francisco  from a four week trip abroad(Nepal). Within several hours of my return I was confronted by a colleague telling me that Facebook was going to allow “real” gambling on its platform. I found this interesting but not surprising. Further investigation has revealed that Facebook has been in discussions with legal online gambling companies that have successfully acquired large numbers of social gamers and Facebook gambling enthusiasts in Facebook. 888 and Gamsys are a few of the names explicitly mentioned in the context of the Facebook gambling initiative.

I am not surprised by this because Facebook has been  considering online gambling as a revenue stream for longer then people realize.

In 2005 I returned from the UK after having spent 3 years launching and running online gambling sites for US based casino operators. One of the first people to approach me about European Internet gambling was a representative form Facebook. This meeting was very hush hush with the representative from one of Facebook’s VC investors leading the charge on questions about revenue per player, cost of acquisition, age and identity checking, the regulatory process, etc. relative to Internet gambling.

I never heard from or saw this investor again. However, it was clear then as it is now that Facebook continues to view Internet gambling as a potential source of revenue.

Fast forward to the introduction of applications on the Facebook platform in 2007 with Mark Pincus’ poker application being one of the first applications launched in Facebook(this is a story in and of itself) and the eventual domination of Facebook social gaming by Mark and Zynga. Zynga eventually began to sell leads/players to traditional Internet gambling companies to generate revenue. It is no accident that the first really successful application in Facebook was a social gambling application.

Zynga and other social gamers adopted  virtual currency and goods(poker chips) in early 2010 as a means of generating revenue from games in Facebook. By the way they actually copied this model from the Chinese casual game companies that proved this model could work. This step was a big one with the leap from advertising as the primary Facebook application revenue source to a transaction model leveraging game virtual currency as the primary source of revenue.  This move also conditioned players to pay for play in Facebook.

Later in  2010 Facebook’s counters the social gamers virtual goods and currency initiative by creating their own virtual currency in the form of Facebook credits and forces all of the social game companies to use this currency and pay Facebook 30% of the proceeds! Virtual currency and goods revenue is now 60% of Facebook’s revenue exceeding advertising revenue. Facebook realizes at this point that its fate and success are directly linked to games and social game revenue.

In 2009 I started to talk to the Internet gambling companies about the importance of social games as a means of acquiring potential real gamblers. I was not taken very seriously until late 2010 when traditional gambling companies began to realize that social gaming itself was a market they wanted to explore. In 2011 the entire Internet gambling industry is all in in regards to social games with most of them launching Facebook games and Facebook Fan pages.  The Internet gambling companies are experimenting with up sell from their social games into traditional gambling venues. They are also using social gaming as a holding area for fatigued gamblers.

The 2011 IPO filing with the SEC has also driven Facebook closer to flirting with allowing Internet gambling because Facebook needs that revenue if it wants to have post IPO(float) revenue to support its stock price. Facebook does not want to be another  Groupon with a falling post IPO stock price due to disappointing earnings. Facebook realizes that its overall growth wil began to taper off after its current growth markets in Asia begin to cool off. In a world of slow or slower growth Facebook needs to get more revenue per Facebook member. Gambling is an additional source of revenue they can exploit.

So will Facebook officially allow sanctioned Euro zone licensed gambling operators to take wagers within the Facebook environement from Facebook members in 2011?

I suspect Facebook will explore this if the SEC, US and EU authorities give them the nod. I would be surprised if it happens before the IPO. Expect this sometime in 2011 after the IPO.”

“…Not a lot of groundbreaking news except for the fact that Murren alluded to new social programs or apps that he described as ‘MGM meets Zynga’. Zynga is the popular publisher of Farmville, a Facebook powerhouse. This jives with what we’ve heard about former Wynn exec Andrew Pascal’s new project, IncuBet.

I’ve said it before and I’ll say it again – this is gonna be big time stuff for these gaming companies. My guess as a first foray is something that fits well within existing law – a way to push MGM brands and hmmmMlife through Facebook – some sort of game that lets you either build casinos or pretend to be a high roller. Not all that innovative (it’s been done) but this time it will have real gaming brands behind it, which could make all the difference.”

“…Social Networks – For years the I-gaming industry has dismissed or only partially entertained a relationship with social networks seeing the networks as at best, distantly related to their business and not a significant source of gaming revenue or player acquisition. The argument being that “gambling” was not allowed in Facebook, the potential players were to young, the players would not transact for “real” money, etc.

Well that has changed evidenced by the opening CEO panel direct acknowledgment that they see social networks as one of the most important initiatives over the next year. More importantly they are actually executing on this plan now by launching exclusive social games and closer integration of their gambling games with their social game offerings.

 Despite all the attempts by gambling operators to dismiss Zynga and other successful social network game companies as low revenue, not real gambling, and not a source of quality gambling leads the numbers are so overwhelming that gambling operators have to take notice. Zynga has a predicted 2011 revenue on the low end of 600 million USD.  Social games in aggregate are now producing more revenue then advertising for Facebook. It is estimated that 1 billion USD and 60% of Facebook’s revenue is coming from social games. If you are a CEO of a gambling company and especially a public company you have to have an answer for the social gaming phenomena.  To give the gambling business credit they are actually doing more then talking about their position relative to social networks and games they are  actively engaged in a number of social network and game initiatives.

US Online Gambling – The potential that the US market might open up to online gambling is also driving more awareness of the role of social networks and social games in the US market. The fact that the US market has banned online gambling has resulted in US players seeking a proxy for gambling within social networks and casual games. Zynga poker is the obvious corollary and the most visible one. However, fantasy sports is big in the US with a number of sites launched in Facebook and in standalone web sites. These gambling models may actually remain popular even after online gambling is legalized in the US. The gambling companies will have to launch similar sites or engage in business deals to up sell players to traditional gambling propositions.

Social Networks As A Player Acquisition And Retention Tool – With so many people active in social networks  many of them playing games in social networks the operators are realizing that there is a potential up sell opportunity. Also, the appetite for gambling style social games has been proven (Zynga). If you can publish a game in Facebook that is like a gambling game and you have good profiling business intelligence to profile players you are going to get conversion.

Retention is also very much an issue with gambling operators. There focus on acquiring, monetizing and not retaining players with alternative lower cost or alternate game play results in very high fall off of players. Social games could be an answer to this problem.

Virtual Currency/Goods – The social games that European gambling companies are building are taking advantage of virtual currency/goods transactions. Virtual currency is a proxy for traditional gaming money transactions and is legal because the prize payout is in a virtual format and not a “cash” payout. The gambling companies are starting to realize that this is a better business model then their cash business because players do not get paid for their winnings and their is no concept of a traditional wallet. All of the money stays with the operator.   A previous barrier to gambling companies taking virtual currency transactions seriously was the low individual transaction amounts. The gambling operators, based on the Zynga model, realize that if a game becomes truly social the amount of transactions can be very high resulting in good revenue per game. The other phenomena that gambling operators may be aware of is the social game “whale” phenomena. At the GDC conference in San Francisco this year a speaker identified a class of social gamers  as whales (sound familiar). These social gamers are transacting up to $150,00 USD a year in virtual currency/goods transactions! Granted the number of players in this classification are small relative to the overall social gamer numbers. However, their profiles and gaming behavior is very similar to the high rollers at land based casinos.  These players are getting VIP treatment from the social game operators for obvious reasons.

Social  Gambling Games – The majority of the games being developed by the gambling operators are social games that mimic real gambling games or could potentially have up sell potential into traditional gambling games. Bingo or bingo derivations  are the obvious choice because they are inherently social games and they have gambling cross over potential.

 Social Game Mechanics In Gambling Games – More interesting is the development of traditional casino games injected into a social network context. Clearly standalone casino games have very little chance of being successful in the  context of the social web. Games have to have social components to encourage communication, rivalries, status among peers, etc. to grow a large enough communities to make the economics of social games work.   The components being added to traditional casino games are leader boards,  competitions around the leader boards to encourage players to invite others to the competitions and to provide visibility  and status recognition of players. Essentially, gambling operators are learning how to create communities of gamers. According to one operator the addition of “game mechanics” have proven to be very successful.

Branding/Monetization/Upsell – In the game development sessions I chaired participants where keen on making money in social games that deviated from gambling transaction revenue.   In the ICE Game Monetization sessions this year this topic was discussed with little enthusiasm from the traditional gambling community. That positioned has changed. I am not sure exactly  why. This new position could be influenced by the developers study of social games where branding is one of the most lucrative ways to monetize games. Branding is such a good revenue source for social games because of the “engagement” time of social games. Real gambling games have  the same engagement characteristics.

Game Development And Mobile Game Influence – The rise of multi platform game deployment and the increased importance of mobile gaming has changing the way gambling game operators are approaching game development. Traditionally games have been developed for the native platform(PC, Web, Phone, etc) to extract as much functionality from the platform to create an optimal game experience. This approach has been challenged by two developments. The market requirement to launch games simultaneously on Android, Apple, Facebook and web is making this approach expensive and increasing the amount of time it takes to realize the full potential for a game.   HTML5 is now seriously being considered as the game development environment of choice to allow for cross platform  near simultaneous  game deployment. It is also being employed to decrease the cost of development. In the CEO panel one of the CEO’s  specifically stated that their future games would be developed in HTML5.

Sophistication Of Games -  The area of game development that really impressed me at the conference was the level of sophistication of casino style games. The multi-level and multi-dimensional games being developed are fascinating and speaks to the study of player behaviour invested in these games. The sophistication is not necessarily expressed by increasing complexity. In some cases the game itself is very simple with added emphasis on key aspect of the game that increase game play time and of course revenue.

.Com Versus .Country – Europe has decided it is going to create a country by country regulatory regime forcing gambling operators to offer games only to their residence and excluding gambling operators that do not have licenses within a particular country.   The motivation for this is well understood as each country struggles though the current economic environment looking for revenue anywhere a government can find it.     However, the impact on Internet gambling in Europe will be profound.   Essentially, the cost of doing business will go up, innovation will be constrained and over all gambling revenue will decrease especially for social games that require large communities to keep the games interesting.  This model may also  break down and not be viable in  countries with smaller populations. What will be the options and approach in this situation?

This trend may also be one of the reasons why European gambling operators are going social. They realize that they have to find other less costly. accessible  and lucrative markets to survive and to grow.

Overall, this conference was the first European Internet Gambling conference where I got the sense that the European gambling community understands that it is part of a much larger online gaming community. This realization has given new life to an industry that traditionally defined itself as an isolated online gaming island. The conference was refreshing, with high energy exhibited by the people actually building the games. They where excited about the social gaming opportunity, mobile game development, cross platform development, etc.

 The new and emerging European gambling regulatory model will be challenging resulting in a consolidation in the industry and fewer competitors. US legislators will no doubt be looking at the new European regulatory model and decide if the would work in the US(.state versus .com).

“…For a long time I’ve been saying that younger gamblers are pretty bored by slot machines and features like interactions with Facebook, Twitter, etc… seem overdue. Perhaps this is a move in that direction? I’ve met Pascal a few times but to say I know him would be massively overstating. Still, my impression is that he’s a very smart guy and sees the tech blind spot that a lot of these gaming and hospitality companies have.

Meet incuBET

According to the SEC, Pascal, along with former WagerWorks exec Paul Matthews and a third partner, Humam Saknini have raised $5 million for their new venture.

My original thought was that these guys were adding some social elements to existing slot and video-based games – say maybe coming up with new ideas and partnering with an existing device maker like IGT (WagerWorks was sold to IGT and Matthews went on to work there so relationships likely run deep). The sparse incuBET homepage almost makes it sound like they want to inject wagering into ‘casual gaming’, which is the same code phrase used for games on Facebook, the iPhone and iPad.

Could this be a bigger play than originally thought? Obviously, adding betting to Facebook games wouldn’t be legal in the United States under current law… and changing that sounds like a mighty big job… If I was incuBET, I’d at least be thinking about that possibility for the long term, while working under existing law to make slots more appealing to younger gamblers in jurisdictions that allow them.

“Knowledge@Wharton: Thanks to all of you for coming. I’d like to begin with a question about what gamification is and how it is relevant to business. Kevin, do you want to start?

Kevin Werbach: Sure. I generally define gamification as the application of techniques or mechanisms from game design to business problems and other kinds of non-game problems. So when you think about it, what is it that makes a game fun, what is it that makes it engaging, what is it that makes people want to come back and use it? We can take some of those same techniques and apply them to making online experiences fun, potentially making work experiences more rewarding and potentially encouraging and motivating people to do other things that are beneficial.

Knowledge@Wharton: What would some examples of that be in the business world?

Rajat Paharia: There are a lot of great examples. To put a finer point on what Kevin was saying, at the end of the day it’s all about driving a certain kind of activity or behavior or participation. Every business out there is based on customers of some sort [engaging in] some kind of behavior, whether it’s purchasing something or subscribing to something or watching something. All of those drive business value for the business. So if you can drive that behavior among your consumers, your users, your customers, then you can drive real business value.

This can run the gamut anywhere from a media company that has television shows and wants to drive contact consumption and sharing — so I want more people to read blogs and watch videos and do things like that because that drives advertising revenue — to a company like Microsoft that wants to get people to use more of its products so that they are more likely to upgrade in the next upgrade cycle rather than use a competitive product. All the way to a B to B company using it to generate leads by having the great IT security competition where people can show off how much they know about IT security, and in the process the company generates leads and the people get a sense of accomplishment, satisfaction and winning a competition.

Knowledge@Wharton: Daniel?

Daniel Debow: People have been doing contests for a long time, so gamification is an excellent name for a lot of people who are thematically bringing these ideas together…. There are actually games going on all the time in all sorts of things we do. That’s not really new, right? That’s game theory. That’s people thinking about the workplace in terms of rewards and competition. And then the second part of it is being really creative about different ways to solve the problems. That’s half of what gamification is; it is saying, “Hey, let’s break the barriers of what we’re doing and try and apply things from different domains.” The third part, and this is actually where I think we spend the most of our time, is design. It’s trying different ideas and really thinking about the human psychology of why people will engage in any behavior. At the end of the day, design and thinking creatively and recognizing what’s really happening and trying different things are absolutely central to innovation in business.

Knowledge@Wharton: We often hear about how the millennial generation needs to be constantly rewarded, praised, given feedback, etc. So to what extent is gamification a generational phenomenon?

Paharia: I actually don’t think it is, because it’s based on satisfying these fundamental human needs and desires we have for reward, status, achievement, competition, self expression, even altruism. Those things cross genders, they cross demographics, they cross any segmentation you want to apply. We’re all motivated by some combination of those. Maybe not by all of them, like I might not care about competition, but I will care about individual achievement and getting to the next goal or being recognized for something. And because of that, I think it’s easy to say that generation G, the kid generation that has grown up with Xbox Live, is especially motivated by these things. But you also see them motivating 43-year-old women in Farmville. And you see them motivating young adults in Xbox Live. And you see them motivating kids in Club Penguin. You know, 50 plus, 100K income plus on sites like Comcast, right? It’s fundamentally human, and because of that it applies to everybody.

Debow: Yes, when we first started explaining the idea for Rypple and we were trying to apply a lot of these concepts to something that people think is pretty painful — performance management, getting feedback at work — people said exactly that. It doesn’t matter what age group; it depends on who you are and what motivates you, what makes you think differently. And again, I would go back and say part of the insight is that people have been playing games at work for a very long time. The rewards are different, but status like corner offices and titles, these are things that people are rewarded for and motivated by…. Gamification is just pushing that envelope.

A quick anecdote: I remember a long time ago I went to law school and my civil procedure professor said, “I want you to understand that the legal system is just a giant game.” So the idea that you can look at a system of how humans interact as a game is not unique to what I think gamification is doing today.

Werbach: Yes, it’s important to distinguish games from gamification, and they often do get mixed together. But there’s fascinating, important developments in terms of the significance of games. So the video game industry is a $50 billion business. It’s bigger than Hollywood by most metrics. The vast majority of people under a certain age have grown up with video games their entire life, not just the millennial generation, but people in the workplace, in their 30s, 40s and even 50s are familiar with these kinds of interfaces and techniques. So there’s a great deal that’s interesting that’s happening around games.

But gamification specifically is about taking things from games and putting them into things that are not games, per se. So this is not about going into an immersive 3D world, for example, to do simulation and training where you put a pilot in something that feels like the plane cockpit. That’s what I would call a serious game. It’s related. But it’s something that’s recognizably a game, a virtual environment.

What companies like Rajat’s and Dan’s do is take those techniques and put them into situations that don’t necessarily feel like a game. They don’t necessarily look like a game, but they are and they take advantage of what games can do. And as they said, that can really apply across the board to any demographic.

Knowledge@Wharton: Can you give some more examples of those applications in the business world?

Werbach: Some of the ones that are frequently pointed to as examples: Nike has a system called Nike Plus where they put a little accelerometer into your shoes and you can keep track of your runs and then plug it into your computer and do competitions with your friends, track and see leader boards. Four Square uses point systems and leader boards and concepts like being the mayor. Those are some of the examples that people are familiar with and talk about a lot.

But really what these other two guys are doing and the other companies are doing is more significant because they are solving particular business problems as opposed to just building a stand alone service as a game. So I’ll let them comment more specifically.

Debow: Ours is not a platform to do this in any context. Ours applies to a very specific and often painful problem. People don’t like performance reviews because the world of work has changed so much in the last 50 years. But the way we’ve been managing people hasn’t changed. Our insight was why don’t we apply these techniques to make the process of getting feedback, recognition, setting goals to be much more real time, social and collaborative.

So a simple example: People today would send an e-mail and say, “Hey, you did a good job on that.” And then it’s lost. So we wanted to, for lack of a better term, gamification it by allowing people to create a badge, to send it to a peer, to add meaning to the badge, and then allow others to see why this person got recognized. The key thing is it doesn’t go away. It becomes part of your personal profile forever. Very quickly we began to learn that people started to create value. They started to value this thing that they were being given because it was meaningful. But also it added to their long-term reputation, and they viewed their career as something they wanted to build credible brand around. If they could point people back to all this thanks that they had received and all these badges which were instances of that thanks, they felt it added to their reputation. That’s a simple example of gamification at work.

Paharia: My company provides a technology platform that any business owner can take and integrate into their content or their experience in order to drive whatever particular behavior drives business value for them. That can be used in B to C type arenas. We have many major media companies using our platform to drive content consumption and sharing around their television properties, like “Psych” and “Burn Notice,” etc. They want people to consume more content because it’s an ad revenue driven business. And so therefore they generate more money.

We also have companies using us internally now, so this is, I don’t know what you’d call it, B to E? Business to employee? For sales incentive programs today, the way that most of them work is you sell something and you go put in a PO number in a little system and it says, “Here’s 10,000 points, go buy some golf clubs.” That’s the entire experience. When really salespeople are inherently competitive, so shouldn’t you be having high score tables and real time news feeds and people leveling up and giving them missions, both long-term and short-term, to accomplish? To say, “Here’s the long-term quarter-long goal. And here’s this week, sell 10 more Cisco routers and you’re going to get a spiff.” That kind of thing. Use game mechanics to drive that. All the way down to where you see companies like Kias and Shape Up the Nation using it to get employees to exercise and [improve their] health to drive down health care costs.

Knowledge@Wharton: So how durable is this concept? You have mentioned some obvious and perhaps less serious things like getting badges, leader boards, being the mayor of a location in Four Square, in addition to more sophisticated uses. But isn’t burnout an inevitable side effect when there is widespread adoption?

Werbach: I would say we’re very early, so there’s a lot of hype about gamification and a great deal of excitement. But it’s just at the beginning of the curve. It’s the way social media was and even electronic commerce before that. A great deal of excitement, some early examples, and then what happened was people burnt out on the kind of early simple uses. But then when you step back from a perspective of five years or 10 years, you realize that the impact has been even greater than we anticipated. So whether the term gamification sticks, the kinds of practices that are going on that these companies are doing, and others are doing, I think are enduring because they come back to real enduring problems. How do you motivate people inside your company, outside your company and how do you make things engaging? And that’s something that’s just simply not going to go away.

Paharia: I think social is actually a really good analogy. So Myspace explodes. Friendster explodes. Everybody on the Internet says, “I need social on my website.” And then it even moves into corporate, right? At some point, the same legitimate question gets asked: Aren’t people going to get tired of interacting with all of these different social systems? I think the answer is, yes, people will interact with the ones that they want to interact with and they’ll ignore the rest. So just because The New York Times has commentary on it doesn’t mean I interact with it, doesn’t mean I even read it. I go there for a very specific purpose…. I’ll interact with it where I want to, where it’s compelling for me. And in other places I won’t.

Debow: I’d add two comments. One is that people are experimenting. I think it’s even inherent in what we’re trying to do, which is to try different things and see what works. It’s almost part of the design. But two things I think will stand out — those games that are designed at work around intrinsic motivators, so it’s very quick. You can spike any type of behavior for a short period of time and then you get the burn out. But the examples that are enduring are the ones that appeal to things people really genuinely like to do or want to do — you gave the example of wanting to run — or are based on behaviors that people already engage in before the game came along. Four Square was really based on the observation that people would send text messages to their friends and say, “I’m here.” And so they said, “Let’s build a game around that to amplify that.” I think that’s the one side that you’ll see.

I think the second side is to remember just because [something] has a game element doesn’t make it a good game. There’s lots of video games that fail all the time, and they have lots of leader boards and badges. And similarly you’ll see that in the workspace. The ones that will last are the ones that go back to the initial proposition, the ones that are really well designed and that really get at something core that people really, genuinely want to do.

Werbach: If I could jump back in, that’s one reason that I’ve started a project here at Wharton called “For The Win” with Dan Hunter at New York Law School to try to get at what’s deep and what’s enduring here. We’re engaged in a number of activities to try to kick start serious research and analysis. We believe that this is a major, important, enduring phenomenon, but it is important to look deeply and separate out the wheat from the chaff.

Knowledge@Wharton: Do you see a way where gamification could fail, where it’s used in the wrong way or it’s overemphasized in the wrong direction? Is there any down side to this phenomenon?

Paharia: Yes, absolutely. Like any other tool, methodology, it can be used poorly, and it can have unintended consequences or results.

There have been several stories on the Internet of people doing high score tables and competition around things that they probably shouldn’t be, and driving the wrong kind of behavior. Or rewarding people for making forum posts. Well, if you’re going to reward that, then people are going to be typing garbage in the forum post just to get the reward. Right? You’re not rewarding the right behavior, which should be quality discourse. And so you really want to be rewarding people for getting a good thumbs up on their comments and things like that. To Dan’s point earlier, design is a really important part of this and thinking really clearly about what you are trying to motivate and how you should motivate it. 

Werbach: Any system can be abused because any system can be gamed. And it turns out the people who understand that the best because they think about it every moment are the game designers. I agree with Rajat completely. There’s a real risk but it also, if you follow through this technique thoughtfully, it also has the kinds of mechanisms to counteract that.

Debow: I think that’s the right point. Our lead designer has been very successful building other sorts of social games. He’s actually quite cautious about us experimenting and implementing these things because of exactly that, because you can create incentives that have very perverse results — not any different from any other incentive design system…. And so we’re very careful when we do things at work.

I’ll give you a simple example. Most people think money would incent people to behave and encourage them in one direction. And in fact, even in the consumer web space, a company called Drop Box has exploded in growth because of a very clever two-sided incentive that basically gives you free stuff if you share the product. We experimented with something like that at work, gave people $25 if they shared it. What we found is that people actually were far less likely to share Rypple at work when we offered them a monetary incentive, and much more likely when we removed it and made it much more intrinsic.

But I don’t think these are failures…. You simply have to try things. The good news about gamification is that you tend to not have massive collapses in the financial system when you implement one wrong. You learn pretty quickly.

I think one other point we probably haven’t mentioned but should: Gamification is very data driven. You are absolutely looking in real time at how people react and what are they clicking through and how are they behaving. Because they’re often implemented in a video game context, you can do experiments, little ones. If we change the wording, how do people behave now? If we change the position of the leader board, does that change how people do it? And I think that’s part of the ethos of design about how you build these systems. So you tend to figure these things out as you’re implementing a process to try to change any sort of behavior.

Knowledge@Wharton: So let’s assume that gamification becomes a central part of a company’s strategy, more and more in the next five years. How would a company actually go about implementing this? Would it be the responsibility of the chief marketing officer or the chief technology officer or the chief information officer? What would be the most strategic approach to getting this rolling?

Paharia: It all depends on the application. So if it’s a business to consumer, if I’m trying to get consumers to do more behavior, then it’s typically head of product or head of digital product. If it is a marketing campaign — we’ve worked with Rite Guard, Victoria’s Secret and others — then it is the head of marketing. If it’s the person responsible for the health and wellness of the organization, then it’s typically HR. And if it’s the sales incentive manager, then it’s the head of sales. It’s a very flexible kind of fluid system that can be used anywhere where there are people to be motivated. And because of that, there are different buyers depending on the actual application. 

Debow: Absolutely. We find that we’ll get very senior managers, VP of sales, VP of product who will want to implement something like what we’re doing because we see this as a management problem. But often we’ll talk to tons of HR people. Facebook is one of our biggest customers, and there it’s the HR department that’s initially brought us in but then was embraced by their engineers. So you’ll find different pockets depending on the problem.

I think one thing that’s important about strategically implementing this is understanding that it’s not as simple as asking your 14-year-old kid, “Show me the video game you’re playing,” and then trying to implement that at work. I mean it’s funny, but I think sometimes that’s where a lot of these failures occur. It is a well advised thing to engage with people who have deep experience in human psychology, motivation and game design. As you mentioned, it’s a $50 billion business. This is not a bunch of kids in their basement. This is a large industry that has a large body of knowledge about how to design things that work. And you know, Bunchball’s a great firm, a great example of, “Hey, how can we bring an expertise to bear?” 

Knowledge@Wharton: We have about one minute left. Would anyone like to make a final point?

Werbach: I think we’ve covered the right kind of ground. I think it behooves businesses and people in all contexts to try to understand what’s going on with this phenomenon and not dismiss it out of hand, but also not to get caught up in the hype. But I’m tremendously excited by what I’m seeing, especially its breadth — ranging from academics to start ups to large companies in lots of different fields, [including] social impact. Even the U.S. government is looking at applying these techniques. Five or 10 years from now, everyone in business is going to have some understanding of gamification.

Recently I have published blog items primarily focused on educating online gambling operators on the virtues and threat of social games to  their operations. In point of fact, I have been a bit unfair to the online gambling operators because I have not highlighted their strong points and how social and casual game operators could learn a few lessons from them. Indeed, online gambling operators have a lot to be proud of and social and casual game operators can learn from  online gambling businesses.

The Regulated World – Sooner or later the authorities are going to take social and casual game operators more seriously. The amount of virtual currencies transactions being processed ,  under age issues and social games that mimic real gambling games are a few of the items that are  going to trip a wire in some jurisdiction causing the social game companies to engage in practices that online gambling companies have had to comply with and implement to keep their licensees.

The list of activities and requirements that online gambling operators have to attend to remain legal and safe operators is staggering and non trivial to maintain and implement. To name a few, regulatory legal counsel, auditing regimes, employee background checks, increased charge back management oversight,  auditings of  software platforms,  game outcome monitoring to assure fair and random outcomes, upgrading of  networks and hardware to address denial of service and intrusion attacks,  etc. These activities, systems and safe guards are common practice for online gambling operators existing in  regulated environments. The enforcement of these safeguards does create an expense overhead beyond the thresholds that social gaming companies are comfortable with. However, the time is coming when social game companies will have to pick up their game and comply with external regulations that require processes already used by online gambling operators.

Online Gambling Companies Are Banks – Most online gambling companies have the concept of deposits and accounts to allow for the deposit of funds to game play and for the ability to withdraw funds when needed. Social and casual game companies have not followed this model because they do not have the concept of a cash withdrawal. Virtual currency does accumulate and is referenced as a line item in an accounting system. However, virtual currencies, as of this date, remain in the virtual world. I suspect this is going to change slightly as virtual currencies become exchangeable  amongst themselves and consumers demand the ability to take their currency to another site or game property. Facebook credits are a defacto standard within Facebook and Facebook is not allowing exchanges or transfers between currencies right now. However, I suspect this is going to be challenged as unfair resulting in a potential anti trust or  monopoly claim requiring them to allow for cash out and exchange. This will require social gaming companies  to have exchange rate virtual currency systems,  cash equivalent calculations for  virtual currency and the ability to redeem virtual currency from a virtual currency depository. This all looks very much like the only gambling world.

Code Quality And Speed To Market – Social game companies are notorious for poor quality releases and bugs in their game releases. They do this because their is a higher value placed  on new content releases relative to the quality of  the overall game experience. This is tolerated because of the perceived notion that the games are for fun and not for money. This practice becomes less tolerable as players invest larger amounts of virtual currency into games changing the value proposition for players.

Conversely, Online gambling companies have to be very careful about releasing code that results in incorrect calculations, game outcome flaws, unannounced outages, etc. This is the case because of the amount of money involved and the need to get it right and having a system running all the time.  Their new content releases are less frequent then in the social gaming world not because they have poor developers but because the quality standards are higher based on consumer perception of the value proposition..
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Niche Markets And Profitability – Online gambling companies have the ability to address comparatively tiny markets relative to casual and social gaming companies and still make money.  Social and casual gaming companies struggle with profitability even at the high usage numbers they experience. They do use a number of monetization methods to get to break even. However, their player numbers still have to be very high to achieve profitability. Social gaming competition has already gotten to the point where mass adoption of a single game is very hard( expensive)  requiring social and casual game companies to begin to figure out how to carve out small market segments and make money off of these markets. Gambling companies make games specifically for niche markets that have the potential for generating enough revenue to justify the games development. This goes beyond language localization. Gambling companies also look at cultural differences that impact user interface design and preferences of players. If you can successfully design a game that is truly unique and specialized for a market you can acquire a significant percentage of market share over companies that genericize their games . The social gaming companies might take a look at how the online gambling companies are achieving this and try and copy their techniques.

The online gambling operators are doing many things very well and better then the social game companies. The gambling companies are also very familiar with a regulated world and know how to successfully compete in a regulated environment. Social and casual game companies need to prepare for the day when their world looks very similar to the online gambling world taking some advice from the online gambling world may be a good idea.

“…I recently read an article indicating that Zynga was responsible for generating 500,000 USD for Facebook in the last year. $400,000 of this revenue was from the 30% cut Facebook is taking on virtual currency transactions with 100,000 coming from advertising. This means that the social game company generated about 1.5 billion USD from its social games activity. This is a very nice number indeed and indicates how social games can rival and in many cases exceed traditional online gambling game revenue.

These revenue numbers have not gone unnoticed by online gambling companies or other social game companies. However, the assumption that by just having a game in the Facebook social network equals millions of dollars in revenue is  not the magic answer.  There are many games hosted in Facebook that get little traffic and little revenue. So what is the magic behind the big social game leaders like Kabam and Zynga, what can the online gambling companies learn from them and what do gambling companies have to do to become successful social gambling companies?

Part of the answer to this question can be found in games that have  natural social components outside of social networks. Poker is an obvious example and coincidentally the first game Zynga launched in Facebook that led to their dominance in the social gaming space.

The social elements that social games like poker naturally have are the following:

1.) The Game Requires Players To Engage With Each Other – This may seem obvious, however, many games that are released into the Facebook environment do not require anyone else to play the games.  Many online casinos believe that they can launch a traditional slot machine into a social network and experience instant success. This is clearly not the case and a false assumption that may cost them dearly if they do not understand the social dynamics underlying the success of social games. Essentially, a social game is just that “a game that requires others to participate in the same game allowing  gamers to experience a social dynamic inherent in the game”.  

2.) Increasing Levels Of Achievement – MMOG and role playing games such as Everquest and World of Warcraft demonstrated ealry that in addition to the requirement to engage others in play their needs to be a way to differentiate oneself from the pack by continuously reaching higher levels. In addition to the personal goal to get better achievement is a way to differentiate oneself from others and brag about ones achievements in the gaming community.

3.) Recognition – This is an important feature in Fantasy Sports where many players are as interested in recognition as they are in winning. In addition to engaging others in play a good social game has to have a mechanism to identify key important players  providing them with status and recognition. There is no point in playing with other players unless you can measure each other to determine who is best at any given point. This feature creates a dialogue between players and can result in a  player  inviting others to play to increase awareness of their achievements.

4.) Winning And Gifting – This is an area that is growing in popularity amongst social e-commerce and social game applications and should be a natural for online gambling companies. This adds another social component to a game that encourages a player to engage another player in the game. Gifting points or buying a virtual good with point and gifting it to another player are common ways to draw players into games and to retain them with the hope of obtaining more gifts. Also, there is a tendancy to re-gift the person that gifted a player forming a bond between players and the currency used in a game.

5.) Social Communication – This is a hotly debated topic in the gambling realm because of the risk of collusion.  This is a legitimate  concern especially with a game like poker. However, the risks might out weight the dangers if a system can be put in place to closely monitor the interaction. In poker the chat capability is  a very  simple and powerful tool to encourage dialogue amongst players. In some cases social circles are started in chat rooms and move into the physical world. Adding a skype like function with added video capability could be  a very power tool to grow a  gaming community.

6.) Private Tournaments, Teams and Invitationals – Players like to play with people they know.  Invitations and private tournaments are a great way to encourage others to play with people they know and trust. Each player will have a tendency to invite other players in their network to group privately organized events resulting in new bonds being created and new players added to the gaming platform communtiy.

7.) Number Of Associations(friends) As Status – One of the keys to the Facebook game(yes Facebook and Ebay are games in and of themselves) is the recognition that more associations mean a higher status in the community.  This encourages more invites and a growth in the community. A player is compelled to add more friends and associates to to a  gaming communtiy to increase their own comfort level, gain support for their choice to participate in the game community and share their experience with other people they know and respect. This should natrually happen in a gambling social network.

8.) Notifications, Invitations and Virality – Facebook and other social networks have shown that exponential growth in Facebook application adoption is fueled by  notification and invitation systems. This is the key to the success of Facebook and a system that has to be part of any social game. If Facebook is not the environment you will launch in your   then a notification system should be added to mimic  traditional social game notification systems.

9.) More Games Means More Players – Zynga and Kabam are always releasing new games within the Facebook environment for  a number of reasons.  1.) People get bored and 2.) More content means more players and potentially different demographics and 3.) More revenue. All three of these things have to happen to keep a game community fresh and to continue to increase revenue.  MMOG games achieve this new experience by adding increasing complexity to their games and new features essentially resulting in new sub games emerging in the same game environment.

10.) First Mover Popular Social Games Lead To Market Dominance – Sad but true market share dominance can happen very quickly in a social gaming environment.  We are all 6 degrees apart and a social game can take over a community of like mined people very quickly. This means that the first online gambling operator that  succesfully  launches and manages an online gambling social network will be the big winner.

11.)  Community Managers And Groups – In order for a social game to work the community surrounding it has to be managed. Although some social interaction happens organically much of it has to produced, managed and stimulated based on player feedback, trends and tendencies. This is a 24 by 7 activity requiring a community leader to address issues the community is having, make suggestions to the community to determine how certain game levels may be received and to draw out special interests of the community that may lead to more social interaction. Group dynamics dictate that a communtiy manager has to be on top of the groups activites to assure that positive trends are supported and negative ones are stifulled.

12.) Multiple Monetization Methods – This may not be as much of an issue with traditional gambling. However, social game sites go a long way to introduce a multitude of monetization methods to increase overall revenue and to experiment with  better ways to monetize players. In some cases  a monetization method can have a a negative impact on the community.  This may be a very important factor in the success(or not) of social gambling in the US.  If the price point is too high for a player to get involved or to pay for  prolonged periods in an online gambling activity the monetization will most certainly impact the growth of the community. Lower price points as represented by virtual currency transactions in social games have proven that smaller transactions, lead to more play which leads to more overall revenue.

13.) The Power Of Free Play -   Having a  competitive, low stress and fun environment to learn a game,  relax and play is important for the development of new players and for maintaining players that temporarily are out of funds or want to play casually.  With the exception of Party Poker, I am not  sure that the exisitng gambling companies  really understand how to cultivate the free  to play community to their advantage. This mindset has to change if online gambling companies want to grow social gaming communites.

14.) Positioning Within Social Networks – Facebook currently does not allow for real gambling within Facebook even though it is legal in many countries. They may do the same in the US when Internet gambling becomes legal. If this is the case it is very important for online gambling companies to learn how to cultivate and communicate within social networks without hosting an online gambling operation within the Facebook environment. The reasoning is that the online gambling companies will still have to market within social networks even if their gambling operation is not allowed to operate within that environment.

15.) Player Profiling – Competition for online gamblers is and will become more intense as online gambling law becomes clearer and the US begins to open up gambling to help pay for state and federal budget deficits. This means that you will have to know your existing and potential future players very well  to remain competitive. The good news is that people are providing more and more information about themselves online in the form of Twitter, Linkedin, Facebook, Google searches, mobile app downloads, etc. Leveraging this mountain of information to understand the likes and dislikes of players will be necessary to focus marketing efforts and to acquire consumers most likely to join an online gambling community. This is certainly not easy and requires special search and analysis processing to  make sense out of the mountain of information collected on individuals everyday. However, competencey in this area will be key to success on social online gambling.

Clearly the need to understand the social web in the context of online gambling will be critical for the success of any Internet gambling operation. The tendency for the social graph to create monopolies quickly conceding victory to the online operator that pushes all the right social network buttons should not  go unnoticed. The first mover advantage is greater now then it ever has been because of the power of the social web to communicatete and consolidate quickly. Online gambling companies should act and think like social game companies if they have an interest in being successful social Internet game operators.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.”

Zynga, Facebook, Apple, and many other online companies and services are refining techniques developed by game developers to keep you in their game.

You’re not stupid, but you can be fooled. For millennia, the best salespeople have known how to exploit the vulnerabilities of the human mind. In the burgeoning field of behavioral economics, we’ve begun to give precise names to the mental weaknesses that make us all susceptible to a well-crafted pitch. Drawing on the insights of psychology, behavioral economists have explained why we buy more stuff at $0.99 than at $1.00 (the “left-digit effect”), why we commit to gym memberships we’ll never use (“optimism bias”), and why we don’t return things we buy as often as we should (“post-purchase rationalization”). The giants of the web, from Amazon to Zynga, use similar tricks to keep us coming to their sites, playing their games, and buying their goods. In fact, that’s how they became giants in the first place. Here’s how they game us—and how, in some cases, we wind up gaming ourselves.

Amazon

Eliminating small frictions can radically alter one’s decisions. An elegant demonstration of this comes from research by Eric Johnson and Dan Goldstein, who asked people whether they wanted to opt out of organ donation (i.e., starting with the choice preset at “donate”) instead of asking whether they wanted to donate (presetting at “don’t donate”). That switch caused the pro-donation response to rise from around 40 percent to more than 80 percent. This is the power of defaults: We have a marked tendency to take the path of least resistance.

For many of us, Amazon.com functions as a default because it has all our credit cards and addresses on file. If we asked people how much they would pay to save the time needed to retype that information on another site, they’d most likely say, “Not much.” Most of us don’t value our time so highly. But during the few seconds in which we make our buying decisions, when we are not thinking very deeply, the barrier to entering that data seems too forbidding and we default to Amazon.

• 1. To get this free shipping option, we need to spend at least $25—which means we’ll often add an item.
• 2. If we pay $79 a year, we get free two-day shipping on most items—which makes us buy more, too.

Amazon also created two smart solutions to the problem of shipping cost, which has always been one of the biggest psychological hurdles to buying online. The first is Super Saver Shipping, which sets a $25 threshold to qualify for free shipping. This turns a lot of one-item purchases into two-item sprees, as people add an extra book or CD just to avoid shipping costs.

The more interesting mechanism is Amazon Prime, the option I have been using for years. For an up-front fee of $79 a year, I get free two-day shipping on almost everything I order. I suspect that Amazon Prime causes shoppers to buy considerably more, and for three reasons. First, knowing that one store has free shipping makes us less likely to search for another place to buy. Second, once on Amazon, the cost of shipping is no longer a psychological barrier, so impulse shopping is less inhibited. Third, because we’ve essentially paid shipping in advance, it becomes a sunk cost—so to make it a good deal, we try to amortize our investment by making more purchases on the site.

Netflix knows.
Illustration: Peter Grundy

Netflix

Netflix built a billion-dollar business on one simple principle: People hate late fees. With traditional video stores, customers always had to choose between racking up extra charges and returning an overdue movie without watching it. Besides eliminating the late fee, Netflix offered an exhaustive selection of films from which each user could assemble a personal “queue.” This seemed to create an intelligent system that matches users with the movies they want to see. What wasn’t to like?

In practice, though, Netflix users ended up watching fewer DVDs than they might have expected. (This is fine with Netflix; it saves on postage and boosts profits.) Why? One reason is that Netflix was forcing us to choose based on what we thought we wanted to see in the future—and we’re bad at predicting our preferences.

There’s a beautiful paper by Daniel Read and two coauthors showing the gap between what people want to do in principle and what they want to do right now. They asked subjects to choose several films from a list containing a mix of highbrow titles (e.g., Schindler’s List) and lowbrow titles (e.g., My Cousin Vinny). When asked which film they wanted to watch a few days later, most picked a highbrow one. But when asked which they wanted to watch right now, most went lowbrow. In principle, we want to be the kind of people who watch serious movies, maybe even French ones—just not tonight! And so our queue becomes aspirational, filled with titles that are more ambitious than the ones we really want to watch.

Now that Netflix offers streaming, I’ve dropped the DVDs altogether. With streaming, we no longer get stuck with movies we only want to watch in theory. Instead, we feel like we’re paying for the right to watch any movie at any time—even if we don’t wind up watching many.

Groupon

To my mind, what’s most revolutionary about social buying sites like Groupon isn’t the hefty discounts they’re able to offer. It’s the fact that they’ve taken the embarrassment out of coupon shopping for their target demographic. Survey Groupon’s customers about their views on clipping coupons from the newspaper and I suspect most of them would look down on it.

In fact, the stigma of coupon use is real and broad-based. A recent paper in the Journal of Consumer Research found that shoppers would describe people standing near coupon users, not to mention the coupon users themselves, as cheap or poor. With Groupon, by contrast, the social acceptability is baked into the premise—into the name, even.

• 1. Deep discounts get us interested…
• 2. …but it’s the time constraint that really goads us to buy and not procrastinate.
• 3. Since other people bought, that diminishes the stigma of coupons…
• 4. …especially if they’re our friends and shared that fact on Facebook.

The perception of crowd behavior can be a powerful motivator when it comes to modifying people’s behavior. UCLA’s Noah Goldstein headed up a study a few years back on how to encourage towel reuse among hotel guests. In one experiment, two different signs were tested in rooms. The first was simply an ecological appeal saying that towel reuse is good for the environment; 35 percent of guests complied. The second sign added a social cue: “Almost 75 percent of guests who are asked to participate… do help by using their towels more than once.” The result: a jump to 44 percent compliance.

Groupon’s time constraint is its other secret weapon. Consumers have just a day to decide whether to buy the coupon and lock in the discount. Usually, when we don’t buy something, we don’t eliminate the option to buy it if we change our mind—we can always go back and get it later. But with Groupon, our choice becomes explicit. It’s not just that we’re not buying the coupon; we’re choosing never to be able to buy it in the future. Presented with that choice, many customers will consider how much they might regret the choice not to buy. And because people hate feeling regret, they become more inclined to buy it now.

Zynga

A couple of years ago, I coauthored a paper about the way we value goods. My colleagues and I asked participants to make origami animals. Then we had them bid on their own creations, as well as on origami made by others, much of it clearly of higher quality than what the subjects could make. What we found was that participants placed an irrationally high value on their own creations—and that value was proportional to how long they had worked on it. We dubbed this the Ikea effect, in honor of how your rickety Swedish bookshelf seems perfect after you’ve put hours of frustrating labor into assembling it.

• 1. Once we’ve put so much time into making our farm, we’re sad to lose it.
• 2. Our sense of reciprocity drives us to help out our friends, especially if they’ve helped us. That means more time on FarmVille.

This is the most basic explanation for the appeal of Zynga’s FarmVille and other social games. Once people take all the little steps to build a farm, they become invested in it—and thereby value it more highly. The more complex and difficult and time-consuming a process is, the more we fall in love with our creation and the more we become interested in the game.

The social element adds another kind of compulsion. A lot of the action in these games is about reciprocity: People give you useful things and you’re expected to respond in kind. Economists have learned that reciprocity is an extremely powerful motivator. Ernst Fehr, in particular, has done groundbreaking work on what is called the trust game. In this game, one player is asked to choose between pocketing $10 or giving $40 to a second player—with the understanding that if he chooses the latter, the second player will get to choose between keeping all the money or splitting it 50-50 with the first one.

In rational terms, the second player should choose to keep it all—and knowing this, the first player should keep the $10. But when real people play, they’re far more trusting and reciprocating than rationality would predict. When someone does us good, we want to return the favor, and in FarmVille that translates into spending more and more time playing the game.

Facebook

I’m not exactly part of the Facebook generation, but I do have an account. More important, I teach 800 college students, almost all of whom use the site obsessively—often during class. A few have told me that before exam week, they log into Facebook, hand their computer to a friend, and ask the friend to change the password—and to keep the new one a secret from them until after exams. Watching the evolution of Facebook as a business, it seems clear that the company actively develops features that challenge our limited ability for self-control, since that is what will get us to come back again and again.

• 1. Our Wall is where we curate our identity…
• 2. …so when people post on our Wall, we want to respond right away.

Much of Facebook’s genius revolves around the Wall: a public space that we curate but that other people can add to. Within the universe of the site, where everyone is a “friend,” you feel a special compulsion to respond to Wall posts—to comment on others’ posts to yours and to reciprocate by writing on theirs.

We want our Walls to reflect ourselves. It’s analogous to the way we curate our belongings, which itself is a window into our personalities. (The psychologist Sam Gosling has shown you can learn more about people from their possessions than from spending time with them. Walls are basically the same—a storefront window to the self.) Users want to display a self that is somewhere between their real self and how they would like to be perceived, which creates a substantial motivation for constant monitoring and upkeep of the Wall.

But perhaps Facebook’s most addictive feature is that it allows us to enhance our status in ways that are relatively cheap. When Facebook started its now-defunct Gifts service, people asked why anyone would spend a dollar to send a virtual gift to a friend. But in the first 10 months of the program, more than 24 million gifts were sent. Why? Because we get tremendous social capital from being seen both as generous and as someone whom other people buy gifts for. In terms of status per dollar, it was a bargain.

Apple has you.
Illustration: Peter Grundy

Apple

If you’re an Apple customer, you might have noticed something about your iTunes and App Store purchases: There’s often a lag of hours, even days, before you get your receipts via email. This is probably because Apple is trying to batch-process your credit card transactions to reduce its interchange fees. But there’s a fringe benefit for the company: The delay reduces what economists call the pain of paying.

Imagine I own a restaurant, and I calculate that a $20 entree contains 20 bites—a buck a bite. But I offer you a deal: I’ll charge you 50 cents a bite, and you don’t have to pay for what you don’t eat; I’ll just watch and count as you chew. It’s a good deal, but how much fun will the meal be? Most of us would rather pay under the normal pricing structure, because when payment and consumption take place in the same time frame, we enjoy the experience much less. App Store purchases are like paying by the bite. But the mechanism of the transaction, where the money flows automatically from your credit card and you don’t get a receipt until later, decouples payment from consumption and reduces the pain of paying.

While the delay in charging is good for Apple, the company made a mistake on pricing: It let the apps sell too cheap! There’s an economic phenomenon called anchoring, in which the amount that shoppers are willing to pay is constrained, or anchored, by the first price presented to them. Once a price point is set, it’s hard to dislodge the anchor. Many apps take a lot of work to design, but on the App Store, the expectation now is that they can’t cost more than $4.99—and that most should cost $0.99.

How could Apple have avoided this? For starters, it shouldn’t have allowed any apps to be free. Even a minimum price of 10 cents would have been better. The pull of free is just too strong—dragging down what people will pay for everything else.

How We’re Gaming Ourselves

For some of the online world’s compulsions, we have only ourselves to blame. Think about email: In the past few years, we’ve arrived at an equilibrium point where everyone expects everyone else to be on email all the time. For most people, this isn’t a good thing. One of my friends, the business analytics expert Ken Rona, has shown that charging a nominal amount (5 cents per message) for email caused people to think more carefully about what they were writing and ultimately increased productivity in a significant way. But as with any other social norm, it’s now hard for individuals to opt out. A while ago, I tried to read email only in the evenings, but pretty soon I found myself showing up for meetings that had been canceled 15 minutes beforehand.

How did we get to this point? Most of the emails we receive are useless to us, but paradoxically, that fact may be partly to blame for our feeling compelled to read them. In animal experiments, famed psychologist B. F. Skinner and his colleague C. B. Ferster showed that random reinforcement is far better than regular reinforcement in modifying behavior. If a pigeon gets food every 100th time it presses a button, it will usually keep pressing. But if the reward comes randomly—sometimes after 50 presses and sometimes after 150—the pigeon will press with much more vigor, even after the rewards are removed entirely. Email does something similar. From time to time we get a very important message, so when we see new mail waiting, we are compelled to read it in the hope it might be something wonderful, even though it usually winds up being unimportant.

We also let ourselves be gamed every day by one of the oldest technologies of all: the calendar. Because it displays our nonscheduled time as empty space, our calendar apps encourage us to pack our days with events. Think how differently we’d interact with our calendars if the default was for time slots not to be empty—if, instead, they were prepopulated with tasks like thinking, writing, and planning. We’d be far less likely to neglect the opportunity costs: Every time we accept an obligation, it would be clear that we are giving something up.

Another calendar problem is related to what behavioral economists Gal Zauberman and John Lynch call “resource slack.” Their research has shown that when people estimate future time and money, we are overly optimistic about how much flexibility (slack) we’ll have. But we’re even more unrealistic about time than money. Lynch, who was my dissertation adviser, used to give me this advice: When someone asks you to do something in a year, ask yourself whether you’d accept if it were happening in the next two weeks. Based on our calendar, it looks as if we will have nothing do a year from now. In reality, though, our typical week next year will look a lot like this week.

But until my calendar starts to simulate that, I’ll likely keep surrendering my days to stuff I never should have scheduled.