The Next Economic Paradigm

Tag: real options

1.3 Trillion Dollar Professional Contact Market

“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.

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The Second Impression of Social Media

As we move away from the ROI valuation model for social media and adopt a more dynamic ‘options’ analysis, a different picture emerges.  People are trading options; that is, the right without the obligation to exercise an action.  The next economic paradigm will emerge as a function of people exercising their options.

What are you doing here?

On the surface, there appears to be a lot of ‘feel-gooding’ on linkedin, Facebook, and Twitter, etc.  It is easy to brush them off as trivial, non-productive, and delusional.  I often fall victim spending too much time on these devices and have asked myself, simply: “why?”

Computer Enabled Society

At second glance, however, I have personally developed a few extremely profound, important and valuable relationships through “computer enabled society”.  People who I have never met in person have stepped way out on a limb to help me along.  As a result, I have given these people the option to access my network and they have done the same for me.  Our common purpose makes each relevant and valuable to the other and each are willing to support, mentor, and elevate the other.  We exercise options together.

Impressive Results

The distinction is that what once was a “first impression” – firmness of handshake, fashion, and physical appearance – has become the “second Impression”.

What was once the “second impression” – intellect, wisdom, talent and generosity – has become the “first impression”.

People exercise their options accordingly; first impressions leads us to action.

Evolution or Revolution?

Social media does not care if you are rich, poor, young or old, beautiful or homely.  It does not care about the color of your skin, fat or thin, physical ability or disability.  It does not care what kind of car you drive, clothes you wear, or the size of your home. Or does it?

For every revolution, there is a corresponding evolution.

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What is the ROI for Social Media?

The quick answer is that ROI is indeterminable – get over it.

ROI is a static measurement where financial decision makers look into the Crystal Ball to project a future economic outcome which is then be protracted back into the present to arrive at a value of an investment opportunity.  In case you have not noticed, this valuation method is largely bankrupt.

Like lipstick on a pig

Yet ROI Persists. B-schools teach SWOT; Strengths, Weaknesses, Opportunities, and Threats as a means of dressing up our projections with yet more projections.  All the ROI in the world may predict the economic future but as soon as people react to the market condition through improved information in Social Media, all those models fail.  This is called reflexivity and it is becoming a dominant influence in all financial projections in the age of Social Media.

Fortunately, the true visionaries of the next economic paradigm are increasing in numbers and rapidly moving away from the ROI model into something far more valuable simply by asking the serious questions……

Hey, what exactly is the currency we’re using?

David Bullock and Jay Deragon from the Social Media Connection Network are producing a series of videos investigating the currency of social media where they astutely ask the tough questions, “What are people trading?” and “what is a Tweet worth?” While these may seem like simple questions, they have many an ROI expert stumped.

Nobody really cares if I had bacon for breakfast; so the ROI on that tweet is exactly zero.  However, if you get 15 tweets in an hour on the same subject – there must be something important related to bacon today.  The more people sending bacon tweets, the greater is the value of my “option” to react to what looks like a bacon pandemic.  Still, I hold the option, without the obligation, to expend my limited resources in response.

Options have value

The value of social media is counted in options – not ROI.  Social media is dynamic, not static. Therefore “Strengths, Weaknesses, Opportunities, and Threats (SWOT)” are also highly dynamic moving targets that are highly contagious in social media and cannot be foretold in the next 5 days let alone 5 years. The cardinal rule of business is to collect assets and reduce liabilities. An option is an asset and an obligation is a liability.

ROI fails.

ROI is a future projection brought to the present.  Options are collected in the present and projected to the future – there is a fundamental difference between the two that must not be overlooked.  People are doing something, they have a plan, they are cooking up a new trick and the ROI is indeterminable…

Options have value and obviously people are willing to pay for them with their time at a keyboard, therefore, they are willing to pay for them through any medium of exchange.  This is what people are doing on social media – collecting options. The Next Economic Paradigm will provide a means to cash in those options. Hold on to your chips, the social media game is far from over.

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