Friday, October 17, 2008

Are advertisers rational?

Jason Auerback, Joel Galenson, and Mukund Sundararajan from Stanford had a paper at AdKDD 2008, "An Empirical Analysis of Return on Investment Maximization in Sponsored Search Auctions" (PDF).

Now, now, don't be put off by the frighteningly dull title. The paper is a fascinating look at whether people doing web advertising appear to be acting consistently and rationally in their bidding.

To summarize, in their data, advertisers do not appear to be bidding rationally or consistently.

Bidders very often have inconsistencies in their bidding on keywords over time that violate the ROI-maximizing strategy. The problem was most severe for advertisers that attempted to bid on many keywords. Only 30% of second-price auction bidders who bid on more than 25 keywords managed to keep their bids consistent over time. Only 19% of those bidders managed to maximize their ROI.

It looks like advertisers quite easily become confused by all the options given to them when bidding. 52% of the second price bidders they examined simply gave up and submitted essentially the same bid across all their keywords even if those keywords might have different value to them.

As Auerback et al. say, it may be the case that advertisers have neither "the resources or sophistication to track each keyword separately" or may "not have an accurate assessment of their true values per click on different keywords".

But this brings into question the entire ad auction model. In sponsored search auctions, we assume that advertisers are rational, able to manage bids across many keywords, and able to accurately predict their conversion rates from clicks to actions.

More work should be done here. This paper's analysis was done over small data sets. But, if this result is confirmed, then, as the authors say, a simpler system auction system, one with "improved bidding agents or a different market design" may result in more efficient outcomes than one that assumes advertisers have unbounded rationality.

Please see also my August 2007 post, "Self-optimizing advertising systems".


Ben XO said...

I find it likely that this is at least in part due to the fact that spend size is handed down from on-high for the search-marketting specialists at the various digital agencies to allocate and optimize. I know for certain that sometimes a marketer at an agency will say to a company "you'd be better spending this money elsewhere", and they'd still insist it was allocated in a certain way.

L. Venkata Subramaniam said...

Interesting and I dont think we have heard the last on keyword bidding yet.

Anyway in this paper it is interesting the way inconsistencies has been defined. Also the data set seems too small to be conclusive.

Jack DeNeut said...

I've always suspected that bidders for keywords are acting irrationally and overpaying, simply because for any common value auction with so many participants, the "Winner's Curse" will almost certainly apply. And with the number of bidders for Google keywords increasing every day, this effect will only grow more pronounced in the future.'s_curse

I doubt this will hurt Google or Yahoo - for that to happen, most of the advertisers would have to 1) recognize that the Winner's Curse applies, and 2) have very accurate tracking of ROI on every keyword they bid on, and use that information rationally. This is unlikely to happen.