Tag: Black-scholes

Calculating The ROI of Social Media

On January 18, 2010

This video introduces a new way of looking at social media valuation. People find value in social media otherwise they would not do it. How is that value expressed as a financial instrument? If you engage your clients in the same currency that they are trading among themselves, the greater the likelihood you will realize the value of the new media phenomenon.

1.3 Trillion Dollar Professional Contact Market

By Admin

On June 30, 2009

In General Information

“Hey, I know a guy who owes me a favor …”

It is only a matter of time until professional contacts will be for sale. The problem is that the ROI (return on investment model) is such a poor valuation tool for social media. Another valuation tool used in finance is called Real Options. An option is the right, without the obligation, to act on an opportunity at some time in the future. Social Networks, friends, family, and professional contacts behave much more along these lines.

Five Easy Pieces:

While the calculation for the value of an option is complex, the things we need to plug in are fairly simple in the context of social media:

1.    There must be an inventory of the assets
2.    The future date when the asset can be acquired must be known
3.    The cost of acquiring the asset must be known
4.    The value effects on the enterprise must be estimated
5.    The uncertainty related to the asset must be estimated

The term “asset” in social media space may include: Knowledge, skill, an undertaking of a new project, or the generation of a new idea, etc.

The Social Networking Manifesto:

The objective of the building a social network is to know where the knowledge assets are, how much they can help you, how much they cost to exercise, and the certainty that they will be applicable, available and useful when you need them. Conversely, the best way to increase the value of a social network is to be visible to others, tell people what you can do for them, tell people what you need from them, and establish a reputation for reliability.

Most importantly, everyone must have the right, without the obligation, to accept or decline the opportunity. This is what jump starts ‘supply and demand’ and makes a market a market

Let’s consider all options:

To estimate the value of an option to call on anyone in your network use a financial option calculator tool on the web and plugged in social media numbers. Let’s use Linkedin as the knowledge inventory; 40 million knowledge assets also hold options with their contacts. Say that the expiration date is 1 year (for tax reasons). Assume the market value of their skill is 100 dollars and that at some point in the next year, the value of their skill relative to yourself becomes 200 dollars. The right to buy the asset at the earlier price is worth a premium. Suppose that the volatility of the asset is 50% and the interest rate is 7%.

The value of the “call” is worth about $3.47 dollars. The Call is an option contract that gives the holder the right to buy a certain quantity of an underlying security from the writer of the option, at a specified price up to the specified expiration date.

The value of options in a network:

For the above scenario assuming all assets are equal in price of 100 dollars; if someone has 10,000 1st and 2nd level contacts on Linkedin, the value of their implied call option is about 34,700 dollars. If Linkedin were a stock market, the value of the social contracts that people have with each other is 34K x 40M = 1.3 Trillion Dollars market value for the contracts that people hold and trade.

This is not even the value of the transaction – only the right to have a transaction. The value of the social contract is in the conversations that they hold. Contracts are a financial instrument that can be traded, combined, diversified, and aggregated for real money. It’s only a matter of time.

The Ingenesist Project specifies the structure of an innovation economy where a knowledge inventory, a percentile search engine, and an innovation bank will facilitate and aggregate the 5 components of Option Valuation. Social media applications form the operating system for the market in options.

Options, Options, What Are My Options?

By Admin

On December 20, 2008

In General Information

In finance, an option is the right, without the obligation, of taking a financial position some time in the future. As with any financial term, options are associated with “code speak” such as: volatility, exercise, strike, call, put, etc., glazing over many an eye. At the same time, people want, buy, and trade options all day long in everyday life without even knowing it. Options have value; otherwise people would not want them.

The ROI model of valuation fails when applied to social media. The number of hits per ad dollar just does not translate to brand loyalty or scale into rivers of cash flow. There is little surprise that corporations have great difficulty socializing because they simply don’t exist, except as a folder labeled “ROI” in the filing cabinet of an attorney in Bermuda. In fact, losing control of the message makes for an expensive funeral in that same filing cabinet. The Social Media industry is trying to live in the ROI structure and struggling to create revenue.

The cardinal rule of business is to collect assets and shed liabilities. A “right” is an asset while an “obligation” is a liability. An option is an asset without the liability, to make a decision some time in the future. As such, options favor long term planning and strategic nurturing rather than short term profit taking of the ROI model. Asian countries and corporations set a good example of buying options in the future through product quality, education, and economic patience. American corporations should do the same if they hope to benefit from social media.

People do not want ROI, they want options. They want the option to separate peers from mentors from friends from family. They want the option to experience before buying. People want the option to meet their physical, mental, emotional, and spiritual needs. They want the option to be anonymous or public in their interaction. They want the option to collaborate and support others. They want the option to overcome physical barriers.

People want to meet new people, get new ideas, and hold the option to act on those new ideas or collect on past ideas shared with others. If they exercise an option and discover another along the way, they want the option to pursue many options to meet a changing market. If they create something in one market, they want the option to apply it to adapt it and access other markets. If they help someone else up the ladder, they want an option to access what that person, in turn, has created from their help. If they make a friend, they want the option of meeting their new friend’s friends.

Likewise, when people are in trouble, they will turn to their collection of options and start exercising them as society has for millenia. The great financial transformation will occur when on-line society gets threaded into the fabric of off-line society through the trade of options. This is the area that needs to develop so that all the pieces can fall into place. This may in fact become the lasting legacy of the financial meltdown.

Options can be the traded like money throughout and across on-line and off-line social networks if there were a way to keep track of them. While The Ingenesist Project specifies promising strategies for trading options in a social network with varying levels of practicality, we can say with great confidence that it this next paradigm of economic development will never happen with an ROI mentality.

The Next Economic Paradigm

Tag: Black-scholes

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