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Lifespan of Social Metrics

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Unlike metrics of simple systems, the metrics of complex adaptive systems have a life span. They grow in value over time. And then they decay in value as well.

Take twitter. At first it was follower count – and that still matters some. But over time, people found ways to gain followers that didn’t coincide to the value that they provided, so it started to lose usefulness as an indicator of value from the tweeter.

Jane McGonigal, @avantgame, just posted a series of tweets about how Amazon rating system is being gamed.

Interesting, my book seems to have been targeted last year by some conservative group, individuals encouraged to post negative reviews

a cluster of extremely negative reviews with a conservative POV posted at the same time with weird (untrue) criticism of my biography…

here’s a recent NYT article on partisan groups attempting to one-star bomb books on Amazonnytimes.com/2013/01/21/bus… …

“Here’s what I do: I go to Amazon.com + search for ‘liberal book’. I give 1 star, 1 star, 1 star”youtube.com/watch?v=tGB8Uu…

“Then I search ‘conservative book’ and give 5-star, 5-star, 5-star.” From a tea-party Internet training meetup youtube.com/watch?v=tGB8Uu…

apparently one trick is to purchase book so your review appears “verified”, then cancel order before books ships

Note: I took out a few tweets in the series which were just about her work, rather than about the gaming the stars method she points to.

Knowing that people are giving a count of stars based on their ideology rather than the quality of the work, I am now less likely to put stock in the star count on a given project, especially when it is politically polemic material. Thus the usefulness of the stars decrease for me (and for others) and then for the whole system.

With twitter, we first looked at “follower” count, and then that was gamed. Then the metrics had to start considering other factors like RT count to demonstrate influence. Now we rely on twittergrader, kred, klout, etc to take a great number of factors into weighted consideration to produce an “influence” or reputation score. This amalgam of factors evolves over time.

You might think this is just the way of social media, since it is a fast feedback loop. But actually, I think that a lot of measures of complex adaptive systems work this way.

What comes to mind is Scott Nelson’s story from Blockage in the Thrivability Sketch.

…It was during the crisis of 1857 that the previously ignored insights of a long-haired mathematician, abolitionist, and utopian socialist named Elizur Wright were finally recognized as critically valuable for economic stability.

In the 1840s and 1850s, Wright had tried to convince the state of Massachusetts that life insurance needed reform. As a mathematician, he had been asked calculate the present value of any given policy based on the premiums paid in, a calculation that British mathematicians had called impossible. He created a rule-of-thumb called “net present value” (NPV) to determine the value of a flow of resources in a single instant (present value) and then to subtract operating costs (net).

But the more Elizur calculated, the more troubled he became. Many companies by his calculations spent so much on advertising that they could never pay off their policies. Others profited by canceling policies for those who missed a single payment. The effect was often to end a policy a year before death, leaving families with nothing. Wright fumed, but in vain. In the go-go 1840s and early 1850s, no one would listen to his criticisms and only a few would accept his principle of valuation. But through the 1850s he returned to the Massachusetts legislature with a blueprint for reform. When the Panic of 1857 hit with the failure of a bank called Ohio Life Insurance and Trust Company, Elizur was prepared. This blockage of trade and transport, Wright declared, was a result of distrust. Insurance companies needed reliable accounting practices that would allow Massachusetts to calculate net present value, and internal rate of return. When trust returns, Wright assured them, the blockage will be over.

Unconvinced but without options, Massachusetts adopted Wright’s blueprint, preventing any company from selling insurance in Massachusetts that did not provide complete financial information. NPV offers transparency of obligations.  The panic was short-lived, and Elizur Wright’s accounting principles became the basis of what we now call Generally Accepted Accounting Principles, adopted by millions of companies, states, and non-governmental organizations throughout the world. MBAs take credit for it, but a long-haired radical gave us cost accrual accounting.

Wright took advantage of blockage to identify its root cause – a distrust of opacity. Increased financial transparency was the solution; trust collapses without it. Blockage can let us make institutions open up and make them thrivable.

If the metrics we use in our economy are also being created (even at a very slow pace) they may also be declining in usefulness. Elizur’s methods didn’t anticipate the complex financial instruments to come over 100 years later that obscured the “trustworthiness” of the things our measures aim to reveal.

Consider how the measures you use can be gamed, where they may be in their lifespan of adoption and decay, and what other indicators might be emerging to reveal what matters – the territory and not the map.

Economic Crisis & Transparency: Interview with Scott Reynolds Nelson

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Each Wednesday, we post an interview with someone who is living, exploring, or championing aspects of thrivability – people at the forefront of cultural, organizational, or individual change.

Scott Nelson is Legum Professor of History at the College of William and Mary.  He is an award-winning writer, lecturer, and student of economic and social history.   In 2008, National Geographic published Nelson’s Young Adult book about historical research (co-authored with Marc Aronson), entitled Ain’t Nothin’ But a Man.  It received a full-page review in the New York Times, won 7 national prizes, and was named a best book of 2008 by Publishers Weekly among others.  His current book, Crash: An Uncommon History of America’s Financial Disasters, will be published by Knopf in 2011 or 2012.

Todd: You have recently completed a book called Crash, looking through history at economic crises.  What can we learn from the past?

Scott: Well, crashes are more than financial downturns.  They demonstrate a general sense of uncertainty about institutions, what I call semiotic doubt.  Is this dollar worth what I think it is?  Is this debt going to be paid?  It’s a deep problem with objects that represent wealth as well as fears or concerns about the institutions that create them: banks, mutual funds, or states.

Todd: In what way is the current crisis different than the rest?

Scott: Well, it’s very different from 1929 but more like 1837 or 1819.  In those crises banks were at the center of the controversy – there was a general sense that banks were not pillars of the nation but (in the words of one Senator from 1819) caterpillars.  That is, institutions that ate up everything in front of them.  Bank-centered panics tend to be much more about liquidity, and tend to draw much more concern about the future of banking as an institution.  Now there is lots more rage at banks, too.  There was a little of that in 1929, but not as severe as in this crisis.

Todd: You have written that transparency is often an outgrowth of a crisis.  How has this happened in the past?

Scott: In the 1857 panic, Elizur Wright pushed most for transparency, and he’s really responsible for much of the transparency we see in business now.  He was a socialist, abolitionist and an actuary (no lie) and he was one of the first to apply mathematical analysis to business firms.  He coined the term “return on investment” in the US.  He was angry about how opaque big insurance companies were and pushed Massachusetts to regulate them – effectively to list all their investments and make their books public.  The companies resisted it, but he won his battle in the depths of the 1857 panic.  In later panics his accounting requirements became generally demanded of all publicly-traded firms.

Todd: Transparency seems to be a buzzword, but it is often not clarified, “What are we being transparent about?  And to whom?”  What is called for now?

Scott: Openness of books, transparency, clarity aren’t just things that are nice to have – they can make or break any institution that relies on trust to function.  That includes banks but also NGO’s, funds, etc.  Much of the internal workings of banks for example had been invisible to most folks.  The so-called “stress test” that the federal government used on the banks in 2009 exposed some of the problems with bank operations.  It turned out that many banks had much higher reserve ratios than they claimed.  Likewise many of the big banks were forced to take off-the-books vehicles back into their firms for accounting purposes.  In banks, anyways, that transparency can remove that semiotic doubt.

Todd: Are oversight and legislation sufficient to address the system’s failures?

Scott: No, the institutions really have to change from within.  Legislation can push an institution to make certain numbers visible, but we all know that books can be cooked.  In Countrywide, for example, there were regulators, risk managers, and accountants who were supposed to prevent the firm from taking and reselling the “liar loans”.  But the structure of that firm was such that the folks who were supposed to regulate were the last to find out about an operation.  They had to sign off or be sidelined.  Likewise the biggest banks like Bear Stearns and others found ways to pressure the “regulators” like the bond-rating agencies.  That’s generally why open books are better than what firms call transparency and transparency is better than legislation-mandated rating organizations.

Todd: What do you see as the new context in which institutions or organizations can thrive?

Scott: Well, part of this might be restructuring from the ground up: making internal review of procedures an integral part of the operation of a firm.  Any institution can be stress-tested.  The time to do that is now, when times are tough.  One thing about the 1929 troubles . . . There was a stock market crash in 1929, but the depression arguably came in 1931 when banks carrying lots of foreign debt proved unable to survive once German borrowing institutions failed to pay their debts.  Many of our banks are still sitting on toxic assets that they haven’t marked-to-market yet.  This may be a prologue.  Stress-testing is essential.

Todd: What role can the people and organizations who are not associated with the financial system play in the revamping of the system?

Scott: For years many of the big corporate institutions that I know about modeled themselves on banks.  The CFO really ran the place – he or she made all the important decisions.  Now we see the problem with that environment.  Other organizations need to make themselves into models of the next banking institution we will have.  What will that new organization look like?  It’ll likely be more open, more flexible, and thus more fundamentally trustable than the institutions we have now.  If they aren’t, then we’ve gotten nowhere.

Todd: Thanks, Scott.