Tuesday, June 05, 2007

Cutting Social Network Ties

I have an scholarly interest in social network theory and organizational theory. And sadly, too much personal experience with the power and pitfalls of social networks.

From Orgtheory.net:

"The Cost of Ending Relationships":

The study is interesting because it demonstrates the tangible costs of terminating relationships. In this case, the relationship is purely a market relationship (i.e. an arms-length tie), but even a tie of this type has real value. Just because you don’t spend weekday afternoons playing golf or don’t exchange Christmas cards doesn’t mean that the relationship (if repeated over time) will not develop some of the same predictable qualities of embedded ties. Repeated interaction creates reliability and forms a source of stability for markets that are needed to make the market work efficiently. The finding seems to support Wayne Baker’s (1984) study that showed that as options markets increased in size, they actually became more volatile. Given that there is a positive correlation between volatility and trading costs (demonstrated empirically in this paper), it’s possible that this may be one microexplanation for the observed phenomenon. Markets characterized by repeated exchange among a small group of actors may actually be more cost-efficient than the large, anonymous masses of the efficient markets hypothesis.

The study also demonstrates, rather nicely, that social networks help people lower the costs of doing business. Most network studies focus on the revenue side (i.e. getting a job), but as Joel Podolny maintains, the gains associated with certain structural properties like status or reputation may be mostly due to cost-cutting. High status investment banks hire the best employees at a lower cost than their low status competitors. Securities specialists with good reputations have lower trading costs.

The study also points to an important reason why social networks are so sticky. Actors simply can’t afford to find new acquaintances whenever they grow unhappy with their old ones. Cutting old ties and forming new relationships is costly. Of course, you probably have that figured out already.

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