Tag: efficiency

You Are The Algorithm

On May 4, 2009

You are the algorithm.

Google is an information company. Their corporate charter is to organize the World’s information. Their limitation is that Google cannot organize knowledge because knowledge exists only within the consciousness of a person. Instead, busy little Google spiders scour the Internet looking for high rates of change of information and they use that as a proxy for “knowledge”.

An economy is crawled

Google Spiders favor blogs because of the high frequency of updates, postings, tags, comments and keywords in comparison to static websites. The logic goes as follows; if there is a lot of activity, something must be happening. As a result, an entire industry has grown around the blogging and Search Engine Optimization business; listings are counted, raw data are analyzed, comments provide feedback loops. Most notably, money is exchanged.

B-school tells us that that ROI can only be calculated from long term future projections, not short-term-recent-past spider activity. If this “economy” cannot be projected through ROI, then how exactly is it projected?

Dynamic, like life itself

People are figuring out that the rate of change of information is the best indicator of value as well as the best way to create value. The last mile of social media is the next frontier of value creation as people will emulate ‘Google Spiders’ and scour their community for changing information, new ideas, improved information, and feedback loops to organize, categorize, and distribute. This action will ultimately play out in new corporations built upon perfect dynamic information markets rather than third party selective information markets. Exit Boston Globe, enter Twitter.

Organize this:

The key to unraveling the Innovation economy will be in refining, restructuring and organizing the profound relatedness between information, knowledge, and innovation.

Information is facts and data – this is the medium of exchange or “the currency”. The rate at which the facts and the data change is a proxy for new knowledge being created somewhere and somehow. After all, if there is activity, something must be happening. All of the things that people do with the results creates even more new knowledge – this is innovation. Innovation creates new information. New currency is created because new information is created. Knowledge expands.

There is something in it; otherwise people would not do it

We are seeing the tip of the iceberg; social media is the new engine of the innovation economy. Where information becomes more perfect, markets become more efficient. Where markets are more efficient, knowledge becomes more tangible. Where knowledge is more tangible, innovation is more predictable. Where innovation is more predictable, the innovation risk disappears. The lower the risk, the cheaper and more abundant the venture capital.

People increasingly use social media to improve information, everywhere, any way that they can dream of. They increasingly act locally and share globally to create opportunities for themselves and their communities. People and their behavior is the algorithm of the innovation economy; monetize that. Google did.

Social Enterprise; The Vetting Mechanism; #1

By Admin

On October 26, 2008

In General Information

I read many articles with rants like “all this social network stuff is cool – but show us the money”. Innovation Economics offers a way to see new markets and new businesses that are currently hidden by “the old way” of doing things. This article is part of a series called ‘Business Plans of the Innovation Economy” which will identify ways that Social Networks can command huge markets and drive vast revenues – if, and only if, they align themselves in a specific way….

Managers manage through experience. They observe a situation and compare it to prior situations they have encountered. Through a process of intuitive (statistical) analysis, they calculate the probability of success based on the success or failure of prior experience. This is the reason why managers are often older and also why youth correlates with inability to manage. The depth and breadth of one’s experience is often called wisdom.

Today’s problems, business opportunities, technological change, and competitive strategies are so complex and so integrated across the globe that no single person can accumulate in a lifetime the experience needed to manage at what is called a Pareto Efficiency. A Pareto Efficiency, named after Italian economist Vilfredo Pareto, is an economic condition where a one’s actions benefits at least one person while leaving no other person less better off.

The problem with the “top-down” management structure is that the “top” no longer has a statistically relevant sample of prior experiences from which to fully understand the probable future outcome of their actions – the consequence is that someone always gets screwed (Pareto Inefficient).

The concept of Pareto Efficiency may be what people are today inadvertently calling “sustainability”. I recently saw the movie Syriana with George Clooney about the petroleum industry in the Middle East. It was a convoluted mix of 5 different stories. Each story had its hero doing what they thought was in the best interest of those they represent – “the common people”. Yet the combination of actions carried out by these heroes was absolutely disastrous for all of them. So no matter how benevolent one’s intentions are – and I believe that most corporate managers are acting in the highest integrity that they know – this systemic failure of knowledge will always hurt someone, continually adding to those already at the fringes.

The world of imperfect information is therefore the enemy of sustainability. Perfect information is when everyone associated with a business transaction has the exact same information as everyone else. Perfect information is what makes markets efficient and decisions rational. Agreement is perfectly mutual, supply and demand are perfectly aligned, all risks are perfectly predictable and cause and effect are perfectly transparent.

It follows that any business plan that simply improves information in a market can command revenues proportional to the degree at which market efficient is improved. For example; Ebay owes its 50 Billion dollar market capitalization to the feedback system which supplies improved information in a market. Carfax, The FAA, Craigslist, Democratic Government – all have vetting mechanisms that make their prospective markets more efficient.

Likewise, when the vetting mechanisms fail, the market fails. I attended a lecture once with Charlie Munger, CFO of Berkshire Hathaway. Regarding Enron, he said (paraphrase) “It’s tragic enough when the accounting profession goes bad, but God help us if we lose the engineers”.

This brings us back to management. The business plan of the millennium will be the art and science of perfect information. We know that no single human can accumulate enough experience, however, we also know that perfect information can reside in many people – it is simply a matter of finding the perfect group of people who collectively possess perfect information.

This relatively simple task is entirely and irrevocably the domain of Social Networks. Social Networks are sufficiently enabled by current technology to perform this essential and highly lucrative task – if and only if they align themselves accordingly. Social Networks need to hold a complete and detailed inventory of resident knowledge. Social Networks must cooperate to codify social capital, creative capital, and intellectual capital so that computational methods can be used to assemble unique collection of persons holding unique collections of experiences. That unique set of knowledge assets must then be deployed precisely in the market, ideally targeting specific transactions.

If Real Estate Agents can command 6% of a gazillion dollar housing market and bankers can take another huge chunk – and not even do a very good job at providing perfect information – only to get bailed those at the fringes. Social Networking have a moral, ethical, and entrepreneurial obligation to compete in the sustainability game.

Intellectual Property in the Innovation Economy

By Admin

On September 18, 2008

In General Information

Today there is a big scare that bad people will run off with your intellectual property and make a ton of money with it. Another problem is that the Patent system is so slow and so expensive that the vast majority of innovators simply do not have access to patent protection – many people just keep their ideas secret. This happens in corporations where your ideas are used to advance the careers other people. Often the dominant strategy is to not innovate or keep your ideas secret.

The trend toward open sourcing and crowd sourcing is a real option in the Innovation Economy where Social Network are self regulating. In fact, these articles reference Wikipedia – a community source of definitions.

In practice, If I do dirty deals of Craig’s List, for example; people know where I live….or I get flagged. EBay, for example, produces relatively little to earn their 30B market cap except protect their social accountability system – the EBay feedback mechanism rewards high integrity and punished low integrity. The hallmark of the Web 2.0 is the user generated content as well as the user generated vetting of the content.

This is significant. The efficiency of any market is directly related to the efficiency of the vetting mechanism by rewarding high integrity and punishing low integrity; the FAA vets the airline industry, checks and balances vets democratic government, and the FICO score vets the consumer credit markets. Likewise, things go horribly wrong when the vetting mechanism fails; the accounting profession after Enron, and the sub prime mortgage crisis after loose lending practices, etc. The battlefields of business are littered with similar examples.

In an Innovation Economy, the secret sauce for the production of innovation is far more valuable than any single innovation itself. The secret sauce provides a monopoly on dynamic repeatability rather than some static device. As such, patents can be open-sourced and innovation crowd sourced across a much wider domain of user applications. Such conditions will change the type of innovations that are favored to reflect the broad and sweeping social priorities rather than innovations that are easy to patent, protect, and monopolize – and fear for one’s IP being stolen. Bad people cannot steal your intellectual capital, your social capital, or your creative capital – it is yours, you own it and you have the social network to prove it.

Ownership is the key ingredient of entrepreneurship – everyone owns the innovation economy.

In fact, the objective of innovation economics is for people to take your ideas and make money with them – then give you some of it. Your income arises from collecting royalty payments on your ideas and participation of many ventures. If someone does not play fair, their access to intellectual property and the Percentile Search Engine can be curtailed just like access to credit can be curtailed in modern finance. Therefore, it is in everyone’s best interest to play fair; you may cheat, but only once.

Social Networks are largely self-regulating; no government, Industry, or management is needed. This is efficiency, scaleability, and multiplicity all in one!

The Next Economic Paradigm

Tag: efficiency

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