Retail Algorithms: Friend or Foe?

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How to define a computer algorithm in one easy sentence? Well, in essence, an algorithm is a man-made, step-by-step finite process, where one input leads to a separate output function. Generally, once created, computer algorithms do not require any further human intervention, unless a change to the process or output is required. Their innate value is the ability to operate processes by themselves.

It is because of this that algorithms are considered key to the development of artificial intelligence, particularly since some of these automated processes are now able to ‘learn’.

Algorithms have capturing a lot of media attention over the past few years. Not so much in the field of mathematics, where they originate, but in the world of finance. Algorithms are used in so-called ‘high-frequency’ trading and are increasingly replacing the traditional trader. This has helped increase the profit margins of financial institutions, but has also introduced more market volatility. But the benefit of algorithms has been noticed elsewhere – including an unlikely sector, retail.

Imagine this scenario. You are out shopping and walk into your favorite electronics store to browse the latest laptops for sale. As you have signed up for text alerts, and you have GPS technology and location based apps installed on your smartphone, your bank ‘knows’ you are there. It is aware of your spending habits and history at the retailer, and knows that on this occasion you don’t have enough money in your account to purchase something. These details have been recorded by a retail algorithm. Once you approach the final stage in the process, the algorithm emits the output, a text message. This message is from your bank with the offer of a loan to make purchases, and includes a discount on the product you’re interested in buying. The idea is to lure you into accepting the offer through what is known as “right place, right time” marketing.

Now, I bet you don’t think you’ll see this happening in your lifetime? Well, think again. This practice has already been implemented by a number of companies around the world! It may be the type of marketing strategy that is music to shopaholic’s ears, but for others it could spell out disaster. This is a ploy, of course, to encourage people to fall into debt; the level of debt increasing with the number of offers a person accepts. Though clever, it risks educating future generations to think of borrowing as a norm. With the on-going financial crisis, this may be a fairly controversial use of the computer algorithm. To what extent they could be used more ethically to enhance our shopping experience, or retail environment, remains to be seen.

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