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My Take

Connectivity breeds copying with possibly adverse consequences. Observing the law or following social norms are also forms of copying, but are a consensual aspect of social behavior. What we have discussed in this chapter is a replication of others’ behavior based on limited information, on the part of the originator of the action as well as followers. Systemic risk in financial markets arises from precisely this form of copying behavior. Copying without a clear individual agenda is the issue here.

When Alice asked the Cheshire Cat for directions, she was told “That depends a good deal on where you want to get to.” Upon answering that she didn’t care, the Cheshire Cat replied, “Then it doesn’t matter which way you go” [97].

Granularity in products and organizations is the force that could inject personalized trajectories, mitigating copying due to the FOMO.

Notes

1. The fifth largest Wall Street investment bank, Bear Stearns was on life support over the March 15-16, 2008 weekend and remained solvent on Monday, March 17 only after a $30 billion cash infusion from the Federal Reserve via the regulated commercial bank, JP Morgan Chase [90].

  • 2. The desire for anonymity, safety and insurance will remain the bedrock for a significant demographic, which will use and keep a cash reserve. The worldwide circulation of the most popular $100 billion increased 348 % over the past twenty years; the next most popular $20 billion increased 103.4 % over the same time period [92].
  • 3. Following convention, bitcoin, the currency has a lower case b, and Bitcoin, the technology platform has an upper case B.
  • 4. Bubbles in speculative markets are founded on the imitation phenomenon. Blinder concludes that “the herding behavior that produces them may well be programmed into our DNA” [90].
  • 5. The theoretical explanation of information cascades is Bayes’ Rule. If P( A) is the prior probability of event A and P(B/A) is the conditional probability of event B given A, then Bayes’ Rule says that p(A/B) — {P(A)/P(B)}* P(B/A). P(A/B) can be interpreted as the posterior probability of A, now that B has occurred.
  • 6. This discussion of diffusion of ideas is based on Easley and Kleinberg [12a]. More formally, the threshold for switching to a new product, p, depends upon the relative payoffs. Let p and (1-p) be the fraction of an individual’s neighbors adopting the new product A and the old product B, respectively. Suppose the person has x neighbors and that the payoff from adopting the new product is a, while the old product has payoff b. Then switching to the new product is the best choice if:

  • 7. In the marketing world, disseminating new product information can be structured after this threshold model. Production introduction can be diffused more widely if the threshold is lowered (payoffs raised by raising quality) or if key nodes are infected with the product, either with lowe prices or some promotion. Chapter 5 discusses the role of gatekeepers in infecting key nodes for advertising purposes.
  • 8. It has been found in [96] that this fraction follows a Power Law

The unique feature of the Power Law distribution is that there is no characteristic node or average number of links for nodes, nor a wrell- defined standard deviation, as is common in the bell curve or normal distribution.

Bibliography

[90] Blinder, Alan. After The Music Stopped. New York: The Penguin Press, 2013.

[91] “Developed World Plays Waiting Game with Mobile Payments,” Financial Times, October 16, 2015.

[92] Author’s calculations based on data from the Board of Governors of the Federal Reserve System, retrieved May 2, 2016 from https://www.federal reserve.gov/paymentsystems/coin_currcircvalue.htm

[93] Bohme, Rainer, Nicolas Christin, Benjamin Edelman, and Tyler Moore. “Bitcoin” Economics, Technology, and Governance.” Journal of Economic Perspectives, Spring, 12-15, 2015.

[94] Bhatt, Swati, “Why Don’t More Americans Use Mobile Payments,” International Banker, Spring 2016

[95] Parmar, Neil, “How Crowdfunding Opens Doors Long Closed to Most Investors,” Wall Street Journal, November 10, 2014

[96] Barabasi, Albert-Laszlo. Linked: The New Science of Networks. Cambridge, MA: Perseus Publishing, 2010.

[97] Carroll, Lewis. Alice’s Adventures in Wonderland. London: Macmillan and Co, 1865.

 
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