Claude E. Shannon is largely credited with developing the science of information theory in 1948. This theory has impacted our lives more than almost anything besides the transistor itself. As an example, Shannon called the smallest piece of data a “bit”. Now we all know what bits and bytes are today, but in 1948, there were none. Computers weren't even binary back then (hard to believe).

Thanks to Shannon, when I go to purchase something at Best Buy today, I get asked the question, “May I have your postal code?”. I always decline. Now perhaps Best Buy collects postal codes and does nothing with them. They get archived and just sit on some optical backup drive somewhere for all eternity. But most likely, there is a software application that collects postal codes like manna from heaven.  Every postal code added to its database increases the accuracy of its predictions. What types of products sell where? When it the best time of the month to run promotions? What is the best area of the city to advertise?

You see, computers are now able to recognize patterns in things that we mere humans cannot. What harm is giving over my postal code? It's certainly safer than giving them my phone number. Or having some type of Best Buy Rewards card that I have to carry around and swipe with each purchase. But you know what? To Best Buy, your postal code is just as good as your phone number. It's not like they're going to call you. It's all about analysis at the meta level - the big picture. What products are moving where. If you asked Best Buy who their ideal customer is, they would have an answer. “Married white male, 30-39, living in a detached house inside the city boundaries but outside the downtown core.” Or something like that. Best Buy knows who they like. Down to the street level. “Oh, you live on Polson Street WEST... Ah... Well, sorry Mr. Jones, we can't bend the rules and accept this return past the deadline. Now, if you said Polson Street EAST, we could talk...”

What got me thinking about this is the revelation that the NSA is collecting millions of people's phone records for analysis. Now this is not phone tapping, as they don't care about the phone conversations. They are interested in the “phone number from” and “phone number to”, and that's it.

John C. Dvorak has claimed that, for years, Interpol has had a system that could reconstruct the internal hierarchy of a criminal gang based solely on the phone record analysis. It could determine who the leader was, who his lieutenants were, and all of the junior members. So let's say you have one person you suspect is or was a member of a gang, you could analyze his phone records and those of all that call him, and those of all that call them, and put together a pretty good picture of his associations with people.

A called B at 9:02pm. B called C, D, and E at 9:10pm, 9:11pm, and 9:12pm respectively. C called G. H, and I... you get the idea. A pattern emerges.

Now the NSA is after terrorists. But Best Buy is after consumers with excess discretionary funds. Same techniques to catch similar targets. Not that consumers are terrorists - just that about the same amount of effort is required to find a good customer for Best Buy as finding a terrorist for the NSA. It's all about the amount of information you have, and finding patterns.

There is an interesting book on Claude Shannon that I am currently reading called Fortune's Formula (see link below). Thanks to Warren Buffet's pal Charlie Munger for turning me on to it.