My friend and I recently began to look for a new flatmate to fill a soon-to-be-vacant room in our flat. To smooth the process, I decided to post our flatmate wanted ad on Facebook in the hope that a friend, or friend of a friend, was in need of a room. These actions may seem far removed from my profession as an economist, but a Facebook prompt asking me if I wanted to pay  £1.31 (about NZ$2.55) to “highlight” my post quickly turned my thoughts to narcissism and the economics of signalling.

The economics of signalling deals with the issue of credibly conveying information to interested parties. The need to signal arises because not all relevant information regarding people is cheaply and easily observable. As a result, economists find it fruitful to consider methods of signalling this information and, in turn, what value these types of actions may unlock.

A common application of signalling is the attainment of educational qualifications in order for potential employees to show their ability to employers. Qualifications tell employers that an applicant is willing to sacrifice a significant amount of time, energy, and money to achieve a goal. This type of commitment reflects positively on the applicant and is likely to raise their employment prospects.

However, there are certain types of signals which we wish to avoid giving because they draw attention to negative aspects of ourselves. This negative application of signalling is precisely the one which came to mind when Facebook asked me to pay to “highlight” my post so that it was more visible to my friend list.

Paying money just to ensure that your friends read your Facebook posts is a supreme expression of narcissism. Some people claim that Facebook is already narcissistic enough – but it is one thing to be part of a crowd and quite another to signal to others that you are more of a narcissist than the next person.

Ok, so maybe this conclusion is a little over the top for my specific post. Surely my friends would not have seen highlighting my flatmate wanted ad as a depiction of my own narcissism. But what if my post had been a status update telling everyone about my great day, or maybe a photo of me sunning myself in some exotic location?

It’s common to share these types of things on Facebook and let our friends stumble across our posts in their own time, but paying to make these items more visible and more important than everyone else’s is taking things to another level.

Even if we assume the price of highlighting a post is fair, a coordination problem exists which will stop most people from paying for the service. Although deep down many people would probably love to make their posts more visible, most will abstain from taking such an action because they fear what others will think of them. As a result, Facebook can never expect paid highlighting to make any more than a marginal contribution to its bottom line.

The detailed individual information about the interests and social networks of most of the middle class world on Facebook’s servers is undoubtedly a gold mine. However, Facebook is facing an uphill battle to truly unlock the value of this asset.

Facebook’s market value exceeds US$60 billion (about NZ$75 billion), but most of this value reflects expectations of future earnings growth rather than the company’s current level of profitability. Facebook’s P/E ratio (the ratio of a firm’s share price to its earnings per share) currently sits at just over 70, compared with ratios of about 17 for Google and 11 for Microsoft. In order for Facebook to achieve a P/E ratio over the next five years which is close to these more mature competitors, the company would need to grow its earnings per share by an average of at least 33%pa.

To maintain such rapid earnings growth, Facebook will need to continue aggressively growing its revenue streams. With asking users to pay for posting or highlighting posts unlikely to be able to significantly support this goal, most revenue growth will have to stem from better exploitation of users’ tastes and social connections to more efficiently target advertisements. After all, perfectly infiltrating your target market is the Holy Grail for any marketer.

This exploitation of personal information for financial gain may alarm some of you with privacy concerns – but bear in mind Facebook only gleans as much information about us as we put into their system, so if you don’t like it – don’t use it! I for one wish Facebook good luck and in the meantime hope that none of my friends turn to widespread highlighting of their posts!