Networks, Beliefs, and Asset Prices (with Hatcher, M. )
Abstract: We set out a model of the stock market in which investors with heterogeneous beliefs update their type based on the past performance of neighbours in an arbitrary social network. We study how the network structure and the degree of agents' attention to performance affect the coupled price-type dynamics. Types converge to a group-consensus characterised by network centrality if updating is purely social and to either the group's most fundamental or most chartist type if updating is purely performance-based, with the time to convergence being finite and proportional to the network diameter. For intermediate cases, we identify two key mechanisms which can make group-consensus non-monotonic with respect to investors' attention to performance. These results shed light on when performance-based updating from social networks is stabilising -- or destabilising -- for asset prices. As an application, our model can explain price bubbles and price oscillations by network-performance effects.
Strategic use of social media influencer marketing (with Förster, M., and Vega-Redondo, F.)
Abstract: We set out a model of social media influencer marketing in which a firm may hire influencers to inform consumers about an innovation. Influencers generate sales through purchases of their followers and followers' social networks and set prices for their endorsements. In turn, the firm decides which influencers to hire, which message to convey via the influencers, and sets the retail price of the innovation. In equilibrium, influencers price according to their relative contribution to industry profits. Exploiting na\"ive consumers, they provide exaggerated endorsements that allow the firm to overprice if product quality is low. Furthermore, we show that the firm may be better off if it could commit to hire fewer influencers.
Green Finance, Social Networks, and Environmental Implications (with Hatcher, M. and Zou, B.)
Abstract: Sustainable investment has been a leading trend in recent years, with investment in environmentally-friendly `green assets' seeing a big surge. In this project, we aim to improve understanding of how green asset markets will evolve over time and their likely environmental contribution under different policy scenarios. Evidence shows that many investors have adopted green assets in their portfolios, but there is no conclusive evidence that green assets’ returns differ significantly from other assets with similar risk profiles. Therefore, the popularity of green investing appears to be driven by environmental tastes, not pure financial considerations. Green tastes influence demand for green assets - hence financial returns – and the incentives of firms to be green or engage in environmentally friendly projects. Early work indicates that green tastes have been influential in asset markets, and development of green finance, but the implications for policy are not well understood. In this project, we (1) set out asset pricing models to study transition paths under different scenarios which are informed by empirical evidence, and (2) ask how policy towards green assets should be designed to help achieve social objectives, such as curtailing short-term environmental damage while providing long-term incentives for firms to undertake green projects. Our project is aligned with the 2050 Net-Zero greenhouse gas emission target. Our main innovation is to model the green tastes of investors as evolving according to social influence models. While the impact of social influence on investor beliefs about asset prices and returns has been widely studied, the impact upon tastes for holding green assets has not. Furthermore, investors’ taste heterogeneity induced by market demand is also short of investigation – and we will study how the supply of green projects is affected by different policy options, including taxes or subsidies. Our research will provide policymakers with guidance on which policies and regulations are likely to be most effective in reducing environmental damage.
Anticipating Futures: Understanding the Fundamental Importance of Narratives Through an Integrative Interdisciplinary Approach (with co-authors from the University of Southampton)
Abstract: Businesses, planners and policy makers must make decisions that influence a future about which they have incomplete knowledge. Whilst knowing the future may be illusive, the capacity to adapt as required, is desirable for both organisations and society. We examine what different perspectives can offer, considering how history, storytelling, models, simulations and games, data analytics and AI contribute to anticipating futures. From this overview we detect a fundamental role of narrative as a framing device, and we examine various aspects of its inescapable value no matter what the perspective. We assert that whilst narratives are important to the success of planning activities and to their subsequent uptake and utility, they are no guarantee of success, serving only to animate the body of experience. We identify that a good narrative starts a process which is dynamic and evolves as others engage with it; little is achieved without engagement. Narratives can shift focus or intention, or become hijacked, and the evolving narrative becomes an emergent property of a complex system with no one person or group controlling the process. We argue that an understanding of the essential role of narrative is critical in considering futures, and in achieving desirable outcomes.