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Effects of Information Cascades on Technology Adoption

“Conformity is a powerful instinct. There is safety in numbers. To be better you need to be different, but different is scary”. Human nature for the majority is to take less risk. Combine this nature with the concept of safety in numbers and human decisions become a perfect demonstration of the effects of information cascades. Information cascades refers to the phenomenon of an individual making decisions which are influenced by decisions of others and ignoring his/her own private information.

We see the effects of information cascades every day. The technology adoption habits of individuals are one of the many results of information cascades. The study “Explaining Technology Adoption with Information Cascades” done at the Nottingham University describes how adoption decisions of others regarding technology influences an individual’s decision to adopt new technology. This article analyzes the reasons for initial adoption, where initial adoption refers to a user’s decision to adopt a particular technology before forming strong perceptions of the product. The results of the study strongly suggested the effects of information cascades on the decision making done by individuals when purchasing new technology.

Whether or not the IPhone is the best available phone in the market is debatable. However, due to its widespread popularity people purchase it without fully researching other available options. Another example is the PC vs. Mac battle. Which operating system one chooses should depend on one’s needs. However, due to the Windows operating system being widely adopted the herd mentality prevails and MacBook’s in spite of their several superior features continue to hold a small share of the market.

Interestingly, this move with the herd mentality also results in alienating non adopters. In the article “Tech’s Herd Mentality Alienates Non-Adopters” the author tells a short story about how while watching a game on television a stranger came to the author and condescendingly asked him if he actually still used the blackberry and followed up with list of the merits of owning an IPhone. The author brings up an important point that society continues to tolerate technological discrimination even when bullying and discrimination on most basis has been receiving nationwide attention.

The effects of information cascades in the technology sector have several carried forward effects. One of the more interesting effects is the resulting overvaluation of companies involved in the technology industry. Venture capitalists keen on being in on the next big thing pour large sums of money in tech startups which have never shown a dollar in profits, hoping to strike big with one of them which succeeds. Venture capitalist too understand the effects of information cascades and realize that they just need one of the startups to go viral with the consumers and growth in the value of the company would be huge with many new customers for those companies coming in from the information cascade effect resulting in handsome returns to the investors. Further, other investors seeing investments made by VC’s also follow the herd and put in money into these companies further enhancing their valuations. And this over valuation is not only limited to startups but also to relatively mature tech companies, especially which are seen to be focused on innovation. Thus we see tech companies with staggering PE ratios defying analysis of their income statements and balance sheets.

-Web

References

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1594783

http://www.psychologytoday.com/blog/consider-the-zeitgeist/201204/tech-s-herd-mentality-alienates-non-adopters

http://daringfireball.net/2009/10/herd_mentality

http://www.smartbrief.com/servlet/ArchiveServlet?issueid=E10EEBB8-8751-48CB-B136-9F06C97F3050&lmid=archives

 

 

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