In the internet age, network effects — where an increased number of users can enhance interest in a product — are driving a new wave of structural shifts across markets, the economy and society at large. From the power of viral marketing to the spread of fake news, network effects influence our interactions with one another in ways that could only be imagined just a few years ago.
Earlier this year we saw how such effects can also influence investment markets as retail investors piled into the GameStop Corp. short squeeze — a shift that has potentially profound implications for market volatility, financial stability and investor behavior over the long term.
In many ways, the GameStop episode was just a concentrated example of how things change when new players enter the market and disrupt the status quo. There are large-scale examples, too. As sovereign bond yields rise, a central bank intervening with yield-curve control to flatten its risk-free curve could also be thought of as similarly disruptive in terms of network effects.
Whether the disruption is incidental (GameStop) or premeditated (central banks), both set conditions that are likely to have permanent effects upon the investment landscape, delivering critical learnings for investors today — principally, that investors cannot assume that all market participants share their objectives or play the game according to traditional rules.