More on Techmeme and Financial Markets

My article about herding behavior on social networks, stock markets, and blogs, Facebook, the Quant Fund Meltdown, and the Techmeme Leaderboard, provoked a lot of comment, itself appeared on Techmeme, and has provoked some excellent comments, both on the entry itself and on other blogs.

Gabe Rivera, the creator of Techmeme, noted in the comments:

“I think there is a self-reinforcing effect with Techmeme, but I believe it’s (1.) overstated and (2.) as often good as bad.”

Fundamentally, I agree with Gabe, and I (slightly) regret bringing Techmeme into the discussion, although it has been a psychoactive reference that brought a lot of attention. Techmeme was, however, a grace note in the discussion, and I do want to bring attention back to the deeper thread that I’m following. But first, to the “good or bad?” question.

In an excellent follow-on piece, The Techmeme Pile-On: Good or Bad?, (which has led to yet another Techmeme thread) Matthew Ingram wrote:

Do pile-ons occur? Obviously, they do. And do many of those posts essentially consist of a re-posted excerpt and a “what he said” kind of comment? Definitely. Every system has a certain amount of noise. But I think on balance the posts that do add something to the conversation — and there are many of them on the average day — bring enough value to make it worthwhile.

Take Tim’s post itself (more meta): the sub-links [turned up by Techmeme] included Bob Warfield’s post, which I thought had lots of value, as well as an excellent one from Alexander van Elsas, who I hadn’t come across before. And in many cases — as Alexander points out in his post — I find even further interesting blogs and points of view in the comments section of the blogs that appear as sub-links.

Those kinds of value are very difficult to quantify, but they do exist. It’s a chaotic system, in some ways, like biology or the stock market. But on balance, systems like Techmeme help to bring value to the surface, if you are prepared to look for it.

He’s totally right. Bob Warfield, Alexander van Elsas, and Matthew Ingram himself are now higher on my radar as a result of the cross-commentary Techmeme unearthed. So yes, we’re all a bit smarter as a result.

But my point remains: there are some downsides. And a lot of what I try to do on Radar is to think about the future — often reasoning by analogy, either from history or from parallel markets. And the connection I was trying to make between what happened recently in the stock market, and what is happening now with Facebook and blogging, is extremely important. Connected systems are smarter — until they aren’t. There are feedback effects in what we pay attention to, so that certain things get valued more and more highly.

Think about it for a moment: Techcrunch is the #1 site on the Techmeme leaderboard, yet most of what it covers will be forgotten not merely in years but in months, and have proven to be completely unimportant: the froth of me-too company creation around ideas and trends that as yet are quite immature and poorly understood. (Michael Arrington himself told me that most of the companies he’s covered since starting Techcrunch “have just faded away”.) This is the stuff of a bubble.

And that brings me to another important point: precisely because once everyone “knows” the same stuff, there is no competitive advantage to be had from learning it, eventually that over-known area loses its importance. Even in cases where there is no bubble, one real source of competitive advantage is knowing something others don’t. Web 2.0 has been about unlocking value by sharing what we know, but that doesn’t mean that keeping information private has lost its value as a technique. It’s just temporarily out of favor.

And here is one of the really interesting things I’m learning from my study of financial markets as predictors of the future of Web 2.0: after decades of exploring the potential of the efficient market, where everyone has access to the same information, the current rage on Wall Street is for “dark pools of liquidity,” where trading patterns are invisible even to the participants.

What does this tell us about the future of Web 2.0? It tells us that the pendulum is going to swing from public data to private. I’m not sure when this will happen, but I’m quite confident in the trend. (If you see signs of areas where this is already happening, be sure to let us know.) There’s still a LONG way to go in making all the world’s information accessible, but maybe one sign of the maturity of the Web 2.0 trend will be when more companies are started on the premise of keeping information hidden than on building publicly accessible repositories that grow through user contribution.

(Paul Kedrosky and I will be doing a high order bit, Web 2.0 and Wall Street, at the Web 2.0 Summit on Friday, and we’ve got a whole conference brewing on the subject in New York in February: Money:Tech.)