Duncan Watts Explains Market Bubbles

Reading Duncan Watts piece in Slate Magazine a couple of days back, I was reminded about one of the blog posts a while back on social media. To my mind, it is almost certain that the potential of social media as a whole is being overstated but the enthusiasm for investors and users makes this a difficult argument to make. The poignant point in Duncan Watts' argument is that it is not possible to tell what will constitute success for a firm and so the valuations and assessments on profitability are in many instances just guesses cushioned with convenient justification and hope. It is this enthusiasm that in turn leads to market bubbles irrespective of the industry.

Thus the limits of human ability to tell the future is part of the factors that generate bubbles. Hence by the time everyone agrees to the fact that an industry went through a bubble, it is merely because there has been a backward connection of dots to include stories that make the outcomes almost inevitable. As he concludes, the only certainty at the end of the bubble is that many people suffered genuine confusion and it is the subsequent neat story that is less credible and contrived.

And that explains why his book, Everything is Obvious will probably be one of the business books of the year. And that's because we will be referring to its sometime soon after the social media space has gone through the cycle described in the article.