Modelling Speculative Behaviour

in Web 2.0 and Social Media Companies

Russell Newman | rn106@ecs.soton.ac.uk
This research focuses on development of economic bubbles around IT sectors in the past, and whether similar situations are prevalent in the Web 2.0/social media industry today. Existing research analyses investor attitudes surrounding the dot-com bubble in 2001, and unpicks the patterns of behaviour that made it possible. It explores in detail the attitudes that led to widespread availability of venture capital for Web start-ups, with little or no due diligence.

Web Science DTC

This research aims to identify whether contemporary Web 2.0/social media companies have ever exhibited similar characteristics to those in 2001, through extension of the models in existing research and subsequent simulation based upon these models.

Modelling Behaviour
This model is based upon existing research into the 2001 dot-com bubble, with adaptations made for subsequent findings and other findings about investor behaviours. In particular:
Valliere and Peterson, who indentified a

Market/Industry

Product Demand Fn. Technological Development

Market Share Fragmentation + + Speculation + Capital Available for Investment + Perceived Sector Risk

+ Fn.

cognitive model of investors in bubbleconditions, following interviews with 57 dot-com venture capitalists [1,2].
Sahlman and Stevenson, who

Investors

Perceived Sector Experience +

introduced the idea of capital market myopia - the phenomenon of individual investors over-investing in hyped startups, with catastrophic effects upon the whole sector. The three layers of the model represent actors or entities that comprise the system. These contain tangible and intangible factors that affect the behaviour of other items within the system. The Companies and Investors layers may be thought of as a collection of

+ Companies Product Adoption

+ Venture Capital Investment

Valuation + + Product Development +

+ Market Share + Public/Institutional Investment

+ Investment Volume

A line connected with a + represents a direct influence (i.e. an increase at the origin increases the destination). A - represents an inverse influence (i.e. an increase at the origin decreases the destination). Fn represents a more complex influence that may depend upon other factors within the system.

entities. That is, the system comprises many investors and many companies. Existing research in this field contains extensive work upon venture capital investment, being the foundation of

potentially-hyped start-ups. This offers the opportunity to model venture capitalist behaviour more accurately, which has informed and adapted the design.

Simulating It
With appropriate adaptations to the above model, the research question may be answered using techniques of discrete event simulation (DES) or agent-based simulation. Each offers distinct advantages. The model will firstly be validated by performing a simulation with source data from the 2001 dot-com bubble era. The model can then be adapted and improved to ensure it produces correct

results (i.e. those in literature) for that particular scenario. The same simulation will then be run with corresponding source data from recent Web 2.0 and social media companies. DES provides a means of simulating through entities and feedback links, as shown above, and formulae/logic that informs how and when feedback occurs between entities. Agent-based simulation affords the opportunity to model each type of actor

(investors, companies, etc) as an object with certain behaviours, and to analyse the interactions between them. Given the extensive research available on investor and start-up behaviours, this approach may yield a more accurate simulation.

Web Science

Sources: [1] Valliere & Peterson (2004), Inflating the Bubble: Examining dot-com Investor Behaviour, in Venture Capital vol. 6(1) pp1-22. [2] Valliere & Peterson (2005), Venture Capitalist Behaviours: Frameworks for Future Research, in Venture Capital vol. 7(2) pp167-183. [3] Sahlman & Stevenson (1987), Capital Market Myopia, in Journal of Business Venturing, Winter 1985 pp 7-30.