The Structure of Networks

1. The Structure of Networks with emphasis on information and social networks T-214-SINE Summer 2011 Chapter 16 Ýmir Vigfússon

2. Experiment • The hat contains 3 items • 1 red, 2 blue (50% probability) • 2 red, 1 blue (50% probability) • Which one is it? • You get to look at one item • Then announce your guess • BONUS! • If you guess the correct color, you get a grade boost for the course of 5% (0.5/10). • Let‘s do it!

3. Following the crowd • We are often influenced by others • Opinions • Political positions • Fashion • Technologies to use • Why do we sometimes imitate the choices of others even if information suggests otherwise? • Why do you smoke? • Why did you vote for a particular party? • Why did you guess a particular color?

4. Following the crowd • It could be rational to do so: • You pick some restaurant A in an unfamiliar part of town • Nobody there, but many others sitting at a restaurant B • Maybe they have more information than you! • You join them regardless of your own private information • This is called herding, or an information cascade

5. Following the crowd • Milgram, Bickman, Berkowitz in1960 • x number of people stare up • How many passers by will also look up? • Increasing social force for conformity? • Or expect those looking up to have more information? • Information cascades partly explain many imitations in social settings • Fashion, fads, voting for popular candidates • Self-reinforcing success of books on high-seller lists

6. Herding • There is a decision to be made • People make the decision sequentially • Each person has some private information that helps guide the decision • You can‘t directly observe the private information of others • Can make inferences about their private information

7. Rational reasons • Informational effects • Wisdom of the crowds • Direct-benefit effects • Different set of reasons for imitation • Maybe aligning yourself with others directly benefits you • Consider the first fax machine • Operating systems • Facebook • We will consider the first one today

8. Back to the experiment • I lied about the grade bonus  • Sorry! • Why did I lie? • What happened in the experiment? • (or should have happened)

9. Back to the experiment • First student • Conveys perfect information • Second student • Conveys perfect information • Third student • If first students picked different colors • Break tie by guessing current color • If first student picked same color • Say „red, red, blue“ • What should he guess? • Should guess redregardless of own color!

10. Back to the experiment • For all remaining students • Guess what most others have been reporting • An information cascade has begun • Does this lead to optimal outcome? • No, first two students may have both seen the minority color • 1/3 * 1/3 = 1/9 chance • Having a larger group does not helpfix it! • Are cascades robust? • Suppose student #100 shows #101 his color

11. Modeling information cascades • Pr[A] where A is some event • „What is the probability this is the better restaurant?“ • Pr[A | B] where A and B are events • „What is the probability this is the better restaurant, given the reviews I read?“ • Probability of A given B.

12. Modeling information cascades • Def: • So:

13. Notation • P[A] = prior probability of A • P[A | B] = posteriorprobability of A given B • Using Bayes‘ rule • Applies when assessing the probability that a particular choice is the best one, given the event that we received certain private information • Let‘s take an example

14. Bayes‘ rule, example • Crime in a city involving a taxi • 80% of taxis are black • 20% of taxis are yellow • Eyewitness testimony • 80% accurate • What is the probability that a taxi is yellow if the witness said it was? • „True“ = actual color of vehicle • „Report“ = color stated by witness • Want: Pr[true = Y | report = Y]

15. Bayes‘ rule, example • We can compute this: • If report is yellow, two possibilities: • Cab is truly yellow • Cab is actually black • So

16. Bayes‘ rule, example • Putting it together • Conclusion: • Even though witness said taxi was yellow, it is equally likely to be truly yellow or black!

17. Second example • Spam filtering • Suppose: • 40% of your e-mail is spam • 1% of spam has the phrase „check this out“ • 0.4% of non-spam contain the phrase • Apply Bayes‘ rule!

18. Second example • Numerator is easy • 0.4 * 0.01 = 0.004 • Denominator: • So

19. Herding experiment • Each student trying to maximize reward • In your case, the grade ... • A student will guess blue if • Prior probabilities • Also know:

20. Herding experiment • First student • So if you see blue, you should guess blue

21. Herding experiment • Second student • Same calculations • Should also pick blue if she sees blue

22. Herding experiment • Third student • Suppose we‘ve seen „blue, blue, red“ • Want

23. Herding experiment • So third student ignores own value (red) • 2/3 probability that majority was in fact blue • Better to guess blue! • Everybody else makes the same calculation • No more information being conveyed! • A cascade has begun! • When do cascades generally start?

24. General cascade model • Group of people sequentially making decisions • Choice between accepting or rejecting some option • Wear a new fashion • Buy new technology • (I) State of the world • Randomly in one of two states: • The option is a good idea (G) • The option is a bad idea (B)

25. General cascade model • Everyone knows probability of the state • World is in state G with probability p • World is in state B with probability 1-p • (II) Payoffs • Reject: payoff of 0 • Accept a good option: vg > 0 • Accept a bad option: vb < 0 • Expected payoff: vgp + vb (1-p) = 0 (def)

26. General cascade model • (III) Signals • Model the effect of private information • High signal (H): • Suggests that accepting is a good idea • Low signal (L): • Suggests that accepting is a bad idea • Make this precise:

27. General cascade model • Three main ingredients • (I) State of the world • (II) Payoffs • (III) Signals • Herding fits this framework • Private information = color of draw

28. General cascade model • Consider an individual • Suppose he only uses private information • If he gets high signal: • Shifts • To: • What is this probability?

29. General cascade model • So high signal = should accept • Makes intuitive sense since option more likely to to be good than bad • Analogous for low signal (should reject) • What about multiple signals? • Information from all the other people • Can use Bayes‘ rule for this • Suppose I see a sequence S with a high signals and b low ones

30. General cascade model • So what does a person decide given a sequence S? • Want the following facts • Accept if more high signals than low ones • Let‘s derive this

31. General cascade model • How does this compare to p?

32. General cascade model • Suppose we changed the term • Whole expression becomes p • Does this replacement make the denominator smaller or larger?

33. Herding experiment • Using the model we can derive: • People >3 will ignore own signal

34. Cascades - lessons • Cascades can be wrong • Accepting an option may be a bad idea • But if first two people get high signals – cascade of acceptances • Cascades can be based on very little information • People ignore private information once cascade starts • Cascades are fragile • Adding even a little bit more information can stop even a long-running cascade