Computer enabled society has been called an “alternate universe“. If Social Media intends to make serious money, perhaps it should act like one as well. In finance, Risk is also often called an alternate universe. Beneath the surface of this little 4 letter word resides a complex network of financial instruments that do far more to channel and direct the flow of money than any commercial trend, marketing campaign, or hot new web app.
Risk is actually a very simple thing to understand. All you need to do is answer all three of the following simple questions:
1. Can I identify the peril?
2. What is the probability that the peril will get me?
3. If it does get me, what are the consequences?
The Insurance industry is absolutely gigantic – too important to fail – yet it produces nothing that can be held in the palm of one’s hand. Insurance lives and breathes in an alternate universe of information. Any place where these three questions cannot be fully and completely managed, you will find an insurance product. Where there is no insurance product, there is no capitalism.
Here is how it works: suppose there are 10 identical cabins in the woods. Each cabin is worth exactly 1000 dollars. There is a 100 percent probability that 1 of cabins will burn down every year, but nobody knows which. Therefore, each cabin owner needs to have 1000 dollars sitting in a savings account in case their cabin burns that year. Together, 10,000 dollars sits in a bank not being invested in productive enterprise. Along comes an insurance company to reorganize the assets by offering to replace any cabin if all 10 cabins agree to pay 100 dollar per year premium (plus an admin fee). Now each of the cabin owners can pay 100 dollars per year and release 9000 dollars to the economy as productive capital.
Insurance opens the floodgates of wealth creation; bankers lend, investors invest, and entrepreneurs innovate where risks are reduced to zero; all bets are hedged. But there is a trick; the peril must be identified (fire), the probability must be known (10%), and the consequences must be quantified ($1000). This only works if the assets are pooled in identical lots that have the same probability of loss and suffer the same fate. This is valuable information and it’s worth a whole lot of money.
Social Media is poised to open the floodgates of wealth creation in a similar way – by connecting local communities, neighborhoods, peers, and colleagues with computer enabled society. Today, it is often easier, cheaper, and safer to make friends online than in person, but nothing tangible can really happen until the rubber meets the road; people need to congregate. The Ingenesist Project suggests that the 3 dimensions of human capital, creative capital, and intellectual capital can be identified, normalized, quantified and pooled into risk sharing cooperatives through social media as a means of eliminating innovation risk.
The trick is for society to organize itself in a slightly different way – this is where Social Media needs to position itself with the next generation of applications. If so, the business model for social media will become hugely important to an innovation economy – too important to fail.