In this third part of our discussion on networks and markets, we’ll discuss market behavior, expanding on some concepts you may recall from Advantage.
We’ll define two key phenomena, information cascades and power law curves, and then explore their significant impact on publishing markets.
Information Cascades
An information cascade occurs when individuals observe others’ actions and make the same choice, regardless of their own private information. This “herd mentality” in decision-making arises when people assume others have more or better information than they do.
Key characteristics of information cascades include:
- Sequential decision-making: Choices are made one after another, with later decisions influenced by earlier ones.
- Limited information: Each individual has only partial information about the best choice.
- Rational imitation: People rationally choose to follow others, believing they have better information.
- Potential for error propagation: If early decisions are incorrect, the cascade can lead many people astray.
The Marble and Urn Experiment
To illustrate how information cascades work, consider this experiment:
Setup:
- An urn contains a mix of blue and red marbles.
- The urn has either more blue marbles (e.g., 2/3 blue, 1/3 red) or more red marbles (e.g., 2/3 red, 1/3 blue).
- Participants must determine the urn type.
Procedure:
- Participants take turns drawing a marble, observing its color, and returning it.
- Each participant guesses the majority color (“blue” or “red”).
- Participants can see previous guesses but not the actual marble colors drawn.
Results:
- Early participants base decisions solely on their own draw.
- Later participants may ignore their own draw if it contradicts a strong pattern of previous guesses.
- This can lead to an information cascade where participants follow the crowd, even if the crowd is wrong.
This experiment demonstrates how easily information spreads and how people might make decisions based on limited or potentially misleading information from others, rather than relying on their own observations.
The Power Law Curve in Publishing
The information cascade phenomenon is a crucial factor in why the publishing market’s profit distribution follows a power law curve rather than a normal distribution.
Consider this: Given the number of readers and books, random individual choices of favorite authors should be distributed as a bell curve. However, in pop culture, it never does. Too many social and psychological factors skew the results. Moreover, factors associated with book quality have a low correlation to ascending the power law curve.
Studies show that while good books generally perform better, the same book rarely becomes number one consistently across markets when put into randomized artificial markets. If we could rewind time and run it again, would Harry Potter have ended up the same or as an unknown also-ran?
Social Proof and Decision-Making
You’re likely familiar with the power of social proof, as discussed in Cialdini’s work. This is the mechanics of what social proof is used for. Others’ ratings and reviews cue those who make decisions later.
At the most basic and impersonal level, we look to information sources to quicken our decision-making process and increase the certainty of a positive outcome. For example, when looking for a restaurant in an unfamiliar city, we often turn to ratings after providing information about the type of food we’re interested in. This act concentrates our decisions around the top-rated options with the largest number of ratings.
Implications for Marketing
All of your marketing efforts should be designed to build these core elements that further concentrate users around the results you seek. By understanding and leveraging information cascades and the power law curve, you can:
- Focus on early adopters and build strong ties to kickstart positive information cascades.
- Emphasize social proof in your marketing materials.
- Create and highlight community and core brand values that attract the right people.
- Understand that success can breed success due to the nature of information cascades.
- Be prepared for the potentially outsized rewards (or challenges) presented by the power law distribution in publishing.
By keeping these principles in mind, you can better navigate the complex landscape of publishing markets and potentially position your work for greater success.