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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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The behavior of some accountants, analysts, CEOs, and, yes, greedy, deluded, and short-sighted investorsOne of the most intriguing consequences of the BarabasiAlbert-Jeong model is that because of the power law distribution of links to and from documents on web sites (the nodes of the network), the diameter of the web is only nineteen clicks. By this they mean that you can travel from one arbitrarily selected web page to any other in approximately nineteen clicks, far fewer than had been conjectured. On the other hand, comparing nineteen with the much smaller number of links between arbitrarily selected people, we may wonder why the diameter is as big as it is. The answer is that the average web page contains only seven links, whereas the average person knows hundreds of people. Even though the web is expected to grow by a power of 10 over the next few years, its diameter will likely grow by only a couple of clicks, from nineteen to twenty-one. The growth and preferential linking assumptions above indicate that the webs diameter D is governed by a logarithmic law; D is a bit more than 2 log(N), where N is the number of documents, presently about 1 billion. If the Barabasi model is valid (and more work needs to be done), the web is not as unmanageable and untraversable as it often seems. Its documents are much more closely interconnected than they would be if the probability that a document has k links were described by a normal distribution. What is the relevance of power laws, networks, and diameters to extreme price movements? Investors, companies, mutual funds, brokerages, analysts, and media outlets are connected via a large, vaguely defined network, whose nodes exert influence on the nodes to which theyre connected. This network is likely to be more tightly connected and to contain more very popular (and hence very influential) nodes than people realize. Most of the time this makes no difference and price movements, resulting from the sum of a myriad of investors independent zigs and zags, are governed by the normal distribution. But when the volume of trades is very high, the trades are strongly influenced by relatively few popular nodes-mutual funds, for example, or analysts or media outlets-becoming aligned in their sentiments, and this alignment can create extreme price movements. (WCOM often led the Nasdaq in volume during its slide.) That there exist a few very popular, very connected nodes is, I reiterate, a consequence of the fact that a power law and not the normal distribution governs their frequency. A contagious alignment of this handful of very popular, very connected, very influential nodes will occur more frequently than people expect, as will, therefore, extreme price movements. Other examples suggest that the exponent in in market power laws, 1/km, may be something other than 3, but the point stands. The trading network is sometimes more herdlike and volatile in its behavior than standard pictures of it acknowledge. The crash of 1929, the decline of 1987, and the recent dot-com meltdown should perhaps not be seen as inexplicable aberrations (or as just deserts) but as natural consequences of network dynamics. Clearly much work remains to be done to understand why power laws are so pervasive. What is needed, I think, is something like the central limit theorem in statistics, which explains why the normal curve arises in so many different contexts. Power laws provide an explanation, albeit not an airtight one, for the frequency of bubbles and crashes and the so-called volatility clustering that seem to characterize real markets. They also reinforce the impression that the market is a different sort of beast than that usually studied by social scientists or, perhaps, that social scientists have been studying these beasts in the wrong way. I should note that my interest in networks and connectivity is not unrelated to my initial interest in WorldCom, which owned not only MCI, but, as Ive mentioned twice already, UUNet, the backbone of the Internet. Obsessions fade slowly. Economic Disparities and Media Disproportions WorldCom may have been based in Mississippi, but Bernie Ebbers, who affected an unpretentious, down-home style, wielded political and economic influence foreign to the average Mississippian and the average WorldCom employee. For this he may serve as a synecdoche for the following. More than a mathematical pun suggests that power laws may have relevance to economic, media, and political power as well as to the stock market. Along various social dimensions, the dynamics underlying power laws might allow for the development of more centers of concentration than we might otherwise expect. This might lead to larger, more powerful economic, media, and political elites and consequent great disparities. Whether or not this is the case, and whether or not great disparities are necessary for complex societies to function, such disparities certainly reign in modern America. Relatively few people, for example, own a hugely disproportionate share of the wealth, and relatively few people attract a hugely disproportionate share of media attention. The United Nations issued a report a couple of years ago saying that the net worth of the three richest families in the world-the Gates family, the sultan of Brunei, and the Walton family-was greater than the combined gross domestic product of the forty-three poorest nations on Earth. The U.N. statement is misleading in an apples-and-oranges sort of way, but despite the periodic additions, subtractions, and reshuff l ings of the Forbes 400 and the fortunes of underdeveloped countries, some appropriately modified conclusion no doubt still holds. (On the other hand, the distribution of wealth in some of the poorest nations-where almost everybody is povertystricken-is no doubt more uniform than it is here, indicating that relative equality is no solution to the problem of poverty. I suspect that significant, but not outrageous, disparities of wealth are probably more conducive to wealth creation than is relative uniformity, provided the society meets some minimal conditions: Its based on law, offers some educational and other opportunities, and allows for a modicum of private property.) The dynamic whereby the rich get richer is nowhere more apparent than in the pharmaceutical industry, in which companies understandably spend far, far more money researching lifestyle drugs for the affluent than life-saving drugs for the hundreds of millions of the worlds poor people. Instead of trying to come up with treatments for malaria, diarrhea, tuberculosis, and acute lower-respiratory diseases, resources go into treatments for wrinkles, impotence, baldness, and obesity. Surveys indicate that the ratio of the remuneration of a U.S. f i rms CEO to that of the average employee of the firm is at an all-time high of around 500, whether the CEO has improved the fortunes of the company or not, and whether he or she is under indictment or not. (If we assume 250 workdays per year, arithmetic tells us the CEO needs only half a day to make what the employee takes all year to earn.) Professor Edward Wolff of New York University has estimated that the richest 1 percent of Americans own half of all stocks, bonds, and other assets. And Cornell Universitys Robert Frank has described the spread of the winner-take-all model of compensation from the sports and entertainment worlds to many other domains of American life. Nero-like arrogance often accompanies such exorbitant compensation. High-tech WorldCom faced a host of problems before its 2002 collapse. Did Bernie Ebbers utilize the companys horde of top-flight technical people (at least the ones who hadnt quit or been fired) to devise a clever strategy to extricate the company from its troubles? No, he cut out free coffee for employees to save money. As Tyco spiraled downward, its CEO, Dennis Kozlowski, spent millions of company dollars on personal items, including a $6,000 shower curtain, a $15,000 umbrella stand, and a $7 million Manhattan apartment. (Even successful CEOs are not always gentlemen. Oracles Larry Ellison, a fierce foe of Bill Gates, a couple of years ago admitted to spying on Microsoft. Amusingly, Oracles sophisticated snoops didnt employ state-of-the-art electronics, but tried to buy the garbage of a pro-Microsoft group in order to examine its contents for clues about Microsofts public relations plans. Im talking real cookies here, not the type that Internet sites leave on your computer; scribbled memos and addresses on torn envelopes, not emails and Internet routing numbers; germs and bacteria, not computer viruses.) What should we make of such stories? Communism, happily, has been discredited, but unregulated and minimally regulated free markets (as evidenced by the behavior of some accountants, analysts, CEOs, and, yes, greedy, deluded, and short-sighted investors) have some obvious drawbacks. Some of the reforms proposed by Congress in 2002 promise to be helpful in this regard, but I wish here only to express disquiet at such enormous and growing economic disparities. The same steep hierarchy and disproportion that characterize our economic condition affect our media as well. The famous get ever more famous, celebrities become ever more celebrated. (Pick your favorite ten examples here.) Magazines and television increasingly run features asking whos hot and whos not. Even the search engine Google has a version in which surfers can check the topics and people attracting the most hits the previous week. The up-and-down movements of celebrity seem to constitute a kind of market in which almost all the traders are technical traders trying to guess what everyone else thinks, rather than value traders looking for worth. The pattern holds in the political realm as well. In general, on the front page and in the first section of a newspaper, the number one newsmaker is undoubtedly the president of the United States. Other big newsmakers are presidential candidates, members of Congress, and other federal officials. Twenty years ago, Herbert Gans wrote in Deciding Whats News that 80 percent of the domestic news stories on television network news concerned these four classes of people; most of the remaining 20 percent covered the other 280 million of us. Fewer than 10 percent of all stories were about abstractions, objects, or systems. Things havent changed much since then (except on the cable networks where disaster stories, show trials, and terrorist obsessions dominate). Newspapers generally have broader coverage, although studies have found that up to 50 percent of the sources for national stories on the front pages of the New York Times and the Washington Post were officials of the U.S. government. The Internet has still broader scope, although there, too, one notes strong and unmistakable signs of increasing hierarchy and concentration. And what about foreign coverage? The frequency of reporting on overseas newsmakers demonstrates the same biases. We hear from heads of state, from leaders of opposition parties or forces, and occasionally from others. The masses of ordinary people are seldom a presence at all. The journalistic rule of thumb that one American equals 10 Englishmen equals 1,000 Chileans equals 10,000 Rwandans varies with time and circumstance, but it does contain an undeniable truth. Americans, like everybody else, care much less about some parts of the world than others. Even the terrorist attack in Bali didnt rate much coverage here, and many regions have no correspondents at all, rendering them effectively invisible. Such disparities may be a natural consequence of complex societies. This doesnt mean that they need be as extreme as they are or that theyre always to be welcomed. It may be that the stock markets recent volatility surges are a leading indicator for even greater social disparities to come. |
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