Diffusion By Learning
Innovation is terribly important; it is why we are rich. But how exactly does innovation happen? An awful lot of innovation seems to happen via diffusion, i.e., spreading one at a time via a network of who knows who. A recent AER paper considers three possible diffusion processes:
[Consider] situations where the [innovation diffusion] dynamics are driven from within; that is, there are internal feedback effects from prior to future adopters. …
1. Contagion. People adopt when they come in contact with others who have already adopted; that is, innovations spread much like epidemics.
2. Social influence. People adopt when enough other people in the group have adopted; that is, innovations spread by a conformity motive.
3. Social learning. People adopt once they see enough empirical evidence to convince them that the innovation is worth adopting, where the evidence is generated by the outcomes among prior adopters. Individuals may adopt at different times due to differences in their prior beliefs, amount of information gathered, and idiosyncratic costs.
Social learning is consistent with the observed pattern of diffusion of hybrid corn, although we cannot say that it was the sole explanatory factor. We can also say with some confidence, however, that inertia and contagion were probably not the sole explanatory factors, and given Griliches’s findings neither was social influence.
I’ve been watching this innovation process up close for several years, as prediction markets slowly spread through the corporate world. One might hope that we had central technology experts, and once they approved a new tech, everyone would adopt it. No way. People don’t believe something works until they’ve seen it work in something pretty close to their situation. A media story about something far away just doesn’t say much.
Reminds me of the "demonstration farms" model used by the early Extension Service (which was briefly described in Gawande's recent New Yorker article as a model for innovation in health care.
But reading T.R. Reid's book on health care, both France and Germany use smart cards to carry a person's health care history, an example of an innovation which must have been centrally managed. That's a reminder of what seems true for innovation in an American context is not necessarily universally true.
Of course he didn't. He meant that he hoped that we could trust the experts, because that's a pretty critical component in division of labor: the generation of expertise is expensive.
The problem comes with the fact that there's no economic incentive in the current climate for an expert to be right. There's economic incentive for an expert to be convincing, and there's incentive for an expert to push his particular expertise. And so there's counterpressure against experts, because we don't trust that they're telling us what's best for us, but rather what's best for them.
There's a good and entertaining analysis of this here.