UnnecessaryRisk (ThoughtStorms)

This is a highly speculative model, which could be bogus. Tell me what you see wrong with it.

Executive Summary

Consumer choice creates unnecessary risk in the economy, which is pushed back to the ultimate suppliers : labour, and makes them unhappy

1) Consumer choice creates unnecessary risk.

Imagine two rival products launched onto a market. For some products, two alternatives can happily split the market 50 / 50 or 30 / 70 or 95 / 5. The proportion just depends on the preferences of the consumer. But where there is some kind of NetworkEffect that makes the winner more popular, eventually we'll expect to see one fail.

Hence, with two products, 50% of the effort that's gone into the production is doomed to eventual failure. Investments will have been made (of time and materials and capital) which will ultimately lead only to loss.

Now, imagine instead of two rival products, there are ten. Consumer choice benefits, but the probability of any one of them "winning" is now only 1 in 10. And nine of them (maybe 90% of the production) is now failure. Or rather there is an only 1/10 chance of success. More uncertainty has been introduced into the world, hence more risk.

2) That risk is pushed back to labour.

Risk is, of course, accepted by capital. Investment is a risk. And entrepreneurs stake years of their lives trying to make something work. Nevertheless, I also think SupplyChainManagement is a tool for shifting risk back along the supply chain where it ultimately gets dumped on the worker. (JustInTime)


Counter

VirginiaPostrel defends our taste for variety against TheParadoxOfChoice


Criticisms

1) This redundancy is necessary to help identify the best, most desirable products. Hence the extra risk is worth having.

2) This winner takes all model is over-simplistic :

3) "50% of the effort that's gone into the production is doomed to eventual failure" is the wrong way of calculting. The effort that went into the production of each individual unit is succesful as long as the unit is sold and useful to a consumer, regardless of whether the lineage that the product is part of eventually goes extinct. Effort is not justified by the survival of the lineage. (Unlike with, say, genes in an evolutionary system)


It would certainly seem, after the Crisis2008 mainly caused in the DerivatesMarkets, that certain market-instruments have created risks.


See also :