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Social networks, bubbles and market memes

How do ideas cross over from one social group to the next?  It is an interesting question especially in light of the growth of social networks like Facebook and Twitter.  This is also important to investors as well because it can be indicative of when an investment theme has reached a bubble-like state.

Jonah Lehrer at The Frontal Cortex highlights the differences between the two main social networking sites Facebook and Twitter.  The former emphasizes “social closeness” whereas the latter embodies “social similarities.”  Lehrer highlights research that shows we are above all social creatures very much interested in our own “clans.”  The question is when do network effects begin to outweigh the influence of our clans?

A piece over at The Economist notes some research that helps distinguish the effect of our friends versus that of the broader Internet.  Some data from the early days of Facebook, circa 2007, allowed researchers to see how (and when) users downloaded apps.  For those apps that had relatively few overall downloads, friend behavior mattered a great deal.  For apps with significantly more overall downloads, friend behavior was irrelevant.  While this behavior was more complex than anticipated there does seem to be a bit of an online “lemming effect” that takes place when a threshold gets breached.

At a more micro level, some recent research shows what happens to our brains when we are faced with financial bubbles.  Jonah Lehrer, this time at the New York Times, notes how our brains are constantly undergoing an inner argument.  However at the height of a bubble certain parts of the brain shut off making this argument a one-sided affair.  The other interesting aspect is that desire to earn more than our peers, and even strangers, make us more vulnerable to the effects of a bubble by making us less risk averse.

The bottom line in all this is that we are subject to the influence of not only our own social circles, but that of wider social networks as well.  The widespread adoption of social networking is going to continue affecting the way market memes get propagated.  Teasing out the influence of our two social circles is maybe less important than becoming more aware of our own reactions to runaway markets.  The challenge for investors is to be hyper-aware that at the height of market moves we may be subject to psychological forces beyond our conscious control.

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