Tag: behavioural economics

The Age of Viral Finance

Posted on by Steve Sammartino

Click below to listen to Steve read this post (5 min audio)

In a digital world, if we collectively believe in an outcome, it’s very likely to occur.

This is not a new concept. Behavioural Economics says that the economy will respond to the future conditions people believe will transpire. Because they expect it, they make it so. Downturns can become inevitable, just by thinking one might happen.

But it isn’t just memes and videos that can go viral. Our financial markets, which are fully digital, have also become susceptible to virality. An idea can become true, a market can crash or a bank can fail, simply because we think it might happen. The idea becomes the truth. This just happened with Silicon Valley Bank. Their story is an allegory for our modern world.

World’s First Viral Bank Failure

Silicon Valley Bank (SVB) is a very important bank to the startup and tech eco system in the USA. In 2021 when times were good and money was flowing, they were filling up with deposits. Just like any bank, they wanted to put those deposits to best use. So they bought a large amount of long term bonds at the then interest rates at a little over 1% per annum. This was a quasi bet that interest rates wouldn’t change much. Granted, they had been very low for around a decade. Then in 2023, the interest rate goes from near zero, to 5%. This means that SVB has all these unrealised losses on their books. If they had to sell them in the short run, they’d be in some trouble. The reason is that the new higher interest rates, make the bonds worth less, around 95 cents on the dollar. At the same time, the startup eco system was simply spending their capital and not raising more, because financial markets were tightening. And this started to create a bit of a crunch.

Then, in February, a tech blogger named Byrne Hobart wrote a post proclaiming the SVB was functionally insolvent. It actually wasn’t – all banks have less money than they take in. (In Australia, banks only require 17.5% of deposits on hand). The rest they loan out. As you can imagine, this blog post, raised many eyebrows in Silicon Valley. People started to worry. Then, within a couple of weeks, various venture capitalist group chats, all started to send messages around, advising their portfolio companies to withdraw their money from SVB. And because everything is digital, this happened very quickly. As would be the case with any bank, if everyone wanted their money back immediately, they wouldn’t be able to do it. Within weeks SVB had to shut its doors. It was the fastest Bank Run in US history.

This was the worlds first ever Viral Bank Failure

In the same way that a tweet can go viral, so can the idea that a bank might fail, go viral. SVB became insolvent, because people thought it would become insolvent. A bank which was valued at over US$40 billion a few months back, no longer exists.

Learn how fast AI is changing our world – get me in to deliver my mind blowing new Keynote on AI  at your next event – Time waits for no one.…

Collective Digital Reality

It’s as if the digitisation creates a natural gravity. It empowers ideas which are popular to win, regardless of their veracity.

As a species, collective thought is more important than reality. Once we believe something strongly enough, it becomes a reality. We do this with our gods, our currencies and our economies. We make myths a reality.

The only challenge, is that in a hyper connected world, dangerous ideas can become real – real quick, regardless of what the science says.

—

Keep Thinking,

Steve.

How to predict the future

Posted on by Steve Sammartino

Predicting the future seems like an impossible task, but there is a trick to it. It’s less about guessing what’s next, and more about piecing together what’s already here. A veritable mash up of tools, behaviour and incentives.  Sure, there will always be unexpected turns in events – economic externalities, social backlash and political events which we’ll never predict. But, the vast majority of the time, what is about to occur in business or an industry is there to be seen, and acted upon a long time before it happens at scale. The way I do it is by observing three things in particular.

Anthropology: This is what doesn’t change. Or that which changes very slowly – human behaviour. We are running a very old piece of software as humans – a 400,000 year old code, otherwise known as our DNA. By studying our human proclivities we can observe patterns which demonstrate what we value and how we’re likely to behave in a given set of circumstances. We need to study behaviour, everywhere we go. Paying attention pays dividends.

Technology: This is what does change. The tools we use to get things done, and they are in a constant state of flux. If the barriers to entry are lower enough to switch to a better, more efficient and enjoyable method of getting anything done – we will. The trick, is that very often the tool is available a long time before it is widely distributed. It first must be affordable and available geographically before we can embrace it. When we study what’s next in technology it’s easy to see where shifts are likely to occur because most emerging technologies follow price/ performance ratios which are very predictable. This happens both at the industrial and consumer level. Importantly, the eventual adoption of a new technology can’t be based on utility alone, it must also be socially acceptable to our species. Google Glass comes to mind as an example of something we simply didn’t like. Likewise, large corporations often find it difficult to embrace new technology for weirdly social reasons. Because new technology ignores both the financial and emotional investment a company may have made in now outdated infrastructure. Legacy firms often get disrupted because they fall in love with their tools and systems, instead of the problem they are meant to be solving for people. Read here – successful humans don’t like change.

Economics: This is what ties to the above two elements together. A simple way to define economics is the study of incentives. Wider incentives are what shapes our behaviour, and in turn influences the way money flows around people and the systems we live inside. The question we need to ask here, is will this technology facilitate the way people behave and provide a big enough incentive for them (Corporations and Consumers) to move to this new way of getting things done. If so, how will it change the way money, things and people move around.

So, when it comes to thinking about tomorrow, start by thinking about what’s already here today.

– – –

👉Get my updates by email here.🦄

One thing we must learn from Tinder to create a successful app

Posted on by Steve Sammartino

Screen Shot 2015-08-06 at 5.16.46 pm

The reason Tinder works is simple. It replicates human behaviour in the real world. The moment someone walks into a night club they look around at the faces of people and say to themselves, Yes, No, No ,Yes, No, No, No, No Yes, Yes. And the people they are looking at are doing the same thing back at them – assuming of course they are both looking to meet someone. But in the actual nightclub there is that awkward discovery process of trying to work out if the other party feels the same way. Which then becomes the business model of the nightclub – Sell people drinks for that few hours of the discovery process.

Tinder circumvents all of this. It takes what we do anyway, but makes it happen faster and on the couch, instead of at the bar. What tinder doesn’t do, is expect us to behave any differently. After all, the Human Operating System, or H-OS as I call it, is a very old one, 200,000 years plus since its most recent update. Which means that the best use of technology will be leveraging existing behaviour, not trying to change it.

Yet, another reminder that the digital world ‘is‘ the real world.

You should totally read my book – The Great Fragmentation.