Class 4 – Social Network Theory

1. Social Networks, Social Norms, and Behavioral AnalysisLior Strahilevitz , University of Chicago Law School Class 4 – Social Network Theory

2. Course OVErview • Monday’s lecture: The Rational Actor Model and Its Complications – How does classical economics assume people will behave and how consistent are these assumptions with laboratory and real-world observations? • Tuesday’s lecture: Law & Social Norms – What role do informal social norms play in supplementing formal law? Are such norms efficient? How are they enforced? When should we expect to see more / less formality? • Yesterday’s lecture: Social Psychology & Personality Heterogeneity – Do people have similar or dissimilar personalities and dispositions? Can variation be understood in a systematic way? How might law be tailored in light of personality heterogeneity? • Today’s lecture: Social Network Theory – How does information flow among people and within organizations? Is information transmission predictable? What are the economic consequences of particular pathways for information to flow? • Tomorrow’s lecture: Legal applications – How might behavioral law & economics influence regulatory policy? How do social norms incentivize the creation of intellectual property? Can personality explain variation in the way judges think about criminal procedure? Can social network theory explain and rationalize information privacy law? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

3. What is social network analysis? • “Network analysis assumes there is no way of knowing in advance how groups or social positions come about, i.e. how combinations of relations are formed. Network analysis analyzes overall relations in an inductive attempt to identify behavior patterns and the groups or social strata that correlate with those behaviors. Then it sorts out the pertinent groups a posteriori and identifies the concrete constraints of structure on behavior at the same time as it uncovers constraints on structure from group interactions. . . . The main point is that the primary focus of study should be relations or links between units, effective or potential.” Alain Degenne and Michel Forse, Introducing Social Networks (Arthur Borges translation 1999). • So the idea is that we are going to understand social systems by examining linkages among people and the way those linkages affect economic and social interactions Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

4. Human networks are almost invariably scale-free networks Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

5. Power-law / scale-free distribution Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

6. Scale-free networks exist in many other contexts – United Airlines & Air China Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

7. Scientific citation and co-authorship networks tend to be scale-free • Legal precedent citation networks also conform to power-law distributions. Most cases are largely ignored, and other precedents are cited very frequently. See Thomas A. Bell, The Web of Law, 44 San Diego Law Review 309 (2007). Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

8. The scale-free nature of networks makes them very efficient • Travers & Milgram, An Experimental Study of the Small World Problem, 32 Sociometry 425 (1969). • Randomly selected person given a document, urged to get it to a person unknown to them (subjects given only the target’s name and told that he is a stockbroker in Boston). Participants must forward the letter to someone they know, who could then forward it to someone she knows and so on until it reached the target. • Random sample of Boston residents got the letter to the stockbroker using average of 4.4 intermediaries. Random sample of rural Nebraska residents got the letter to the stockbroker using average of 5.7 intermediaries. 217 of the 296 subjects sent their documents to someone, and of these 217, 64 reached their target. From the Nebraska result came the scientific basis for the idea that “six degrees of separation” are all that stands between two randomly selected Americans. • Modern update on Milgram’s experiment finds that on average just 3.76 intermediaries separate any two people randomly selected from the entire Facebook population. See Lars Backstrom et al., Four Degrees of Separation, WebSci ‘12 Proceedings of the 3rd Annual ACM Web Science Conference 33 (2012). Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

9. Strong ties versus weak ties • Mark Granovetter, The Strength of Weak Ties, 78 American J. of Sociology 1360 (1973). • Hugely influential paper in sociology, cited nearly 25,000 times in the literature • Most influential for a theoretical insight (concerning the need to focus on weak ties in information dissemination and organization) and an empirical observation (about the importance of weak ties in matching job seekers with employment opportunities) • Also opines about the relationship between weak ties and collective efficacy / political solidarity Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

10. Weak ties versus strong ties • Strength of a tie is a function of: • Duration (how long have you known x?, how often do you see x?) • Emotional Intensity (how well do you like x?, how important is your relationship with x?) • Intimacy (do you confide your secrets in x? does x confide in you?) • Reciprocal services (Do you and x turn to each other for advice or help with sensitive matters? Could you rely on each other in a crisis?) • Strong ties exhibit network “closure.” High probability that your strong ties are strongly tied to your other strong ties, be they familial or non-familial ties. Weak ties are much less likely to exhibit closure. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

11. Weak ties versus strong ties in employment matching • Strong ties are most motivated to help you find a job • But weak ties are most likely to know about jobs opportunities that you don’t already know about Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

12. Weak ties versus strong ties in employment matching • Job seekers learn about and obtain jobs largely through word of mouth • 16.7% of sample learned about job through contact they see often (strong tie) • 55.6% of sample learned about job through contact they see occasionally (weaker tie) • 27.8% of sample learned about job through contact they see rarely (weak tie) • Source of information about job opportunity is usually employer or someone one degree removed from employer • Information came from prospective employer 39.1% of the time • Information came from someone one degree removed from prospective employer 45.3% of time • Information came from someone two or more degrees removed 15.6% of the time Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

13. Typical pathway for job opening information Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

14. Weak ties and social cohesiveness • Granovetter also argues that the working class Italian-American community of Boston’s West End may have failed to defeat an urban renewal project that destroyed the neighborhood because of a lack of weak ties. • Community was thick with overlapping ties, largely familial and clannish • No formal organizations and few local employers meant that isolated networks of strong ties had few bridges connecting themselves • This disadvantaged the community in terms of collective efficacy to combat an existential threat • Nearby Charlestown had local employers and rich organizational life; it successfully defeated a similar urban renewal effort Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

15. Some modern extensions, replications, and non-replications of granovetter • Brown & Konrad, Granovetter was Right: The Importance of Weak Ties to a Contemporary Job Search, 26 Group & Organization Management 434 (2001) (replicating the result, and showing that displaced job seekers who relied on weak ties enjoyed better employment outcomes than those who relied on strong ties) • Ioannides & Loury, Job Information Networks, Neighborhood Effects, and Inequality, 42 J. Economic Literature 1056 (2004) (providing a nice literature overview and directions for future research) • Yakubovich, Weak Ties, Information, and Influence: How Workers Find Jobs in a Local Russian Labor Market, 70 American Sociological Review 408 (2005) (replicating the Granovetter result in a Russian community) • Bian, Bringing Strong Ties Back in: Indirect Ties, Network Bridges, and Job Searches in China, 62 American Sociological Review 366 (1997) (finding that jobs in Tianjin, China were acquired more frequently through strong ties rather than weak ties but that job seekers who use weak ties were more likely to obtain better jobs than those using strong ties) Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

16. Weak ties have limits • Morten T. Hansen, The Search-Transfer Problem: The Role of Weak Ties in Sharing Knowledge Across Organization Subunits, 44 Administrative Science Q. 82, 106 (1999). • Weak ties within a firm help project teams search for useful knowledge held by other teams and subunits efficiently • Weak ties are very efficient mechanism for transferring stand-alone information • But complex knowledge is not effectively transferred across weak ties • Thus the presence of weak ties speeds up projects depending on the transfer of stand-alone information and slows down projects depending on the transfer of complex information • This is consistent with the Granovetter analysis of job openings, which typically entail stand-alone information • See also KatjaRost, The Strength of Strong Ties in the Creation of Innovation, 40 Research Policy 588 (2011) (arguing that strong and weak ties are necessary complements). Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

17. Next uP: Hong Kong Bakeries & Chinese firmsNow: Questions on Granovetter ? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

18. weak ties and strong ties in action • Gina Lai & Odalia Wong, The Tie Effect on Information Dissemination: The Spread of a Commercial Rumor in Hong Kong, 24 Social Networks 49 (2002). • Examines information dissemination in the wake of a 1997 rumor that a major bakery chain in Hong Kong was going to close suddenly, which sparked a “bakery run” among customers holding cake vouchers • Widespread survey administered very soon (December 2 to 8, 1997) after the rumor spread through Hong Kong (November 24, 1997) • By time of survey 90.9% of respondents had heard about the incident. • (Hong Kong residents) Do you remember it? • Information about closure is stand-alone information • Researchers asked who you heard the rumor from and who you told. Today, social scientists can examine Twitter (social media) to answer these kinds of questions. See, e.g., Yuri Takhteyev et al., Geography of Twitter Networks, 34 Social Networks 73 (2012). Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

19. Weak and strong ties in action • 60% of informed respondents hear news from television (24% only from television) • 42% of informed respondents hear news via personal ties (16% only from personal ties) • 22% of respondents spread the news to other people (Are they extraverts?) • Cake voucher holders & locally born residents much more likely to be informed about rumor through social ties; people informed about news from a personal source much more likely to spread it to someone else; older residents significantly more likely to hear the news & spread the news. • Surprisingly, cake voucher holders not more likely to hear news from kin. • Social networks tend to be stratified: respondents tended to have the same birthplace and employment status as informant; age, marital status, education also similar • 74% of respondents heard information from non-relatives, but respondents spread information to more evenly divided mix of kin (45%) and non-kin (55%) • This suggests that a small number of individuals spread information to a large number of people. We’ll say more about who these people may be shortly. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

20. Some surprising results • Information did not flow more rapidly via weak ties than strong ties • Information spread more rapidly via relatives rather than non-relatives • Information reached respondents slightly quicker through social ties than through news media and other channels (marginally significant) • Older respondents heard the news significantly sooner • What might explain these results? • Strong ties may be more important in China than in US (recall Bian on labor market) • Strong ties may be employed in a zero sum situation (run on local bank / bakery) • Information may be too trivial to warrant activation of low-intensity weak ties • Maybe strong ties are activated in routine information exchange but weak ties are used in purposive information search? • Other explanations? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

21. Questions and comments on the hongkong bakery rumor ? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

22. Ronald burt: Structural holes • Burt’s concept of Structural Holes is, like Granovetter’s Strength of Weak Ties, a foundational idea in social network theory Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

23. The benefits (and costs) of brokerage • Those who broker structural holes in an American electronics company are disproportionately • well-compensated • receive the strongest performance evaluations • are most likely to be promoted • are most likely to be credited with good ideas Ronald S. Burt, Structural Holes and Good Ideas, 110 American J. of Sociology 349 (2004) • Creative breakthroughs often occur for those who leverage methodologies and facts that are known in one cluster of strong ties but unknown among another cluster of strong ties. Exposure to non-redundant information is beneficial. • People who form key linkages within organizations are central to the organization’s success, and this power entails leverage, which engenders economic rewards • Counterargument: Network closure (omnipresent strong ties) facilitates mutual monitoring / reduces shirking, improves information flows, shared social norms, permitting more effective cooperation. See James S. Coleman, Social Capital in the Creation of Human Capital, 94 American J. of Sociology 95 (1998). Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

24. How well does Burt’s theory of structural holes translate to china? • Zhixing Xiao & Anne S. Tsui, When Brokers May Not Work: The Cultural Contingency of Social Capital in Chinese High-tech Firms, 52 Administrative Science Q. 1 (2007). • Examine whether the benefits that flow to structural hole brokers in western firms also arise in Chinese technology firms • Examine social network structure, pay and job satisfaction at four-firms, including one (Hardware) that is a “high-commitment firm”, another “low-commitment firm” (Software) and two firms that are somewhere in between (Mobile and Telecom). • High commitment firms ask employees to take on extra-role responsibilities, gives them added job security in return. Goal is to prompt mutual investment by firm in worker and by worker in firm. Characterized by clan-like strong ties. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

25. How well does Burt’s theory of structural holes translate to china? • Hypothesis 1: Structural hole brokerage will not be rewarded in China (a country with a stronger collectivist orientation than the United States). • Hypothesis 2: Structural hole brokerage is more likely to be rewarded in low-commitment organizations (Software) than in high-commitment organizations (Hardware) • Xiao & Tsui find stronger support for Hypothesis 2 than for Hypothesis 1 • Brokers in High-Commitment Organizations seem to be standing on two boats at once; acting in a manner that causes no one to trust them Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

26. How well does Burt’s theory of structural holes translate to china? • Brokering a structural hole is associated with significantly lower pay and bonuses in high-commitment organizations. No significant relationships in low-commitment organizations (though the signs are still negative). No significant relationship to job satisfaction metric (though signs are again negative). Closure, not brokerage is the rewarded strategy. • Qualitative findings consistent with the Hansen research on complex versus stand-alone information: “Several interviewees highlighted how a cohesive neighborhood around the job is good for the transfer of tacit knowledge, including local knowledge that is heavily embedded in the context . . . or operational technical knowledge that is difficult to learn for oneself.” Xiao & Tsui at 21. • At low-commitment firms, the benefits of weak ties were recognized by some interviewees: “For technology, as long as I have a few good friends with whom I can exchange technological views, it is fine. For management, it is different. You need [to] build up a web of people including top and bottom, different departments, with whom you can speak. . . [W]hen the organization restructures, they will give advice, whether it is good to stay in the old department or go to a new department; whether it is good to try to get a new position; how it will affect my career development, etc.” Xiao & Tsui at 23. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

27. Xiao & Tsui on structural holes • They provide a more sinister take on brokers than Burt does • “[E]mployees themselves [in high-commitment organizations] are expected to fill structural holes in high-commitment organizations. If there are disconnections between groups, cliques, and departments, the cooperative norms prescribe that these disconnected parties be directly brought together immediately.” Pg. 7. • “[N]o firm can entirely avoid cliques inside the organization. It still needs some employees to undertake the valuable tasks of bridging information and resource flows between otherwise unconnected silos inside the organization. Employees who span those boundaries are valuable to the organization and should be rewarded by the organization for doing so. . . . Given the communal-type values of the high-commitment organization, the benefits of structural holes tend to be shared by all the people around the holes, and brokers might not be able to enjoy the information benefits of their bridging behavior to the extent that they could in market-like organizations. Pg. 8. • But if all this is true, it suggests the possibility of severe under-provision of a club good for the firm – connectedness between disparate parts of a large organization. Absent evidence that workers in high-commitment organizations form more social ties or have more interdependent utility functions, brokerage is going to be undersupplied. Information brokerage needs to be incentivized somehow. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

28. Final thoughts on social networks in american and chinese firms • For a more recent (non-empirical) paper on this topic, addressing some of the open questions, see Sun-Ki Chai & Mooweon Rhee, Confucian Capitalism and the Paradox of Closure and Structural Holes in East Asian Firms, 6 Management & Organization Rev. 5 (2009). Still, the literature is very limited, and there is lots of room for further research. • Perhaps the difference boils down to Chinese firms maximizing cooperation and American firms maximizing certain kinds of innovation? It’s not clear this effect results, and if it does result it’s not at all clear that it is by design, but it’s a reasonable interpretation of the available evidence. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

29. Social network theory, social psychology, and social norms • Yuval Kalish & Garry Robins, Psychological Predispositions and Network Structure: The Relationship Between Individual Predispositions, Structural Holes, and Network Closure, 28 Social Networks 56 (2006). • Extraverts have larger networks, with more closure. Their strong ties tend to be strongly tied to each other, perhaps because the Extravert introduced them. Their weak ties are significantly less likely to exhibit network closure. (Extraverts weak ties tend not to be weakly tied to each other). • High neuroticism / low emotional stability have smaller networks (though not significant), but their networks have much less closure. Their strong ties tend not to be strongly tied to each other, and their weak ties tend to be weakly tied to each other. • People who filled a large number of structural holes likely to be highly Individualistic (separate scale not a Big Five metric). Harbor unique view of world, value autonomy, freedom, competition, view group membership as less important and view selves as dissimilar to other group members. What is the causal story behind findings that these people, who bridge structural holes, are poorly compensated in China but well-compensated in the US? Presence of Extraverts may be essential in highly committed organizations, so as to mitigate structural holes whose closure won’t be rewarded through economic incentives. Highly committed organization in which Neurotic individuals are overrepresented may be doomed. Research query: Who is drawn to work in highly committed organizations? By hypothesis it is Extraverts. • Social Network Theory permits a way to formalize our understanding of social norm development, enforcement, and change. What are the network attributes of successful norm entrepreneurs? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

30. What can social network theory offer law? • Tomorrow we will discuss a paper applying social network theory to a foundational problem in privacy law – differentiating public information from private information • Trade Secrets Law: Reasonable precautions – Posner opinion in Rockwell Graphics, 925 F.2d 174 (7th Cir. 1987) holds that firms must employ “optimum security” not “perfect security,” taking cost-justified measures to protect valuable trade secrets if they are to be able to recover for misappropriation. Scholarship needed on how particular steps a company can take to protect its secrets affect the probability of leakage to competitors or potential competitors. • Patent Law: When is a prior use of an invention “secret” such that a subsequent invention is still novel? See W.L. Gore & Associates v. Garlock, 721 F.2d 1540 (Fed. Cir. 1983). • Free speech and defamation law: what are the network conditions under which true / false information is likely to permeate a social network? See generally Berger & Heath, Idea Habitats: How the Prevalence of Environmental Cues Influences the Success of Ideas, 29 Cognitive Science 195 (2005). Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

31. What can social network theory offer law (Continued)? • Corporate law: how does board of directors composition affect the information to which managers have access? See generally Carpenter & Westphal, The Strategic Context of External Network Ties: Examining the Impact of Director Appointments on Board Involvement in Strategic Decisionmaking, 44 Academy of Mgmt. J. 639 (2001). • Criminal law: What are the punishments that can achieve optimal deterrence of would-be criminals who inhabit social networks? See generally Patacchini& Zenou, The Strength of Weak Ties in Crime, 52 European Econ. Rev. 209 (2008) (teenager communities characterized by many strong ties and few weak ties are more likely to see high crime, and weak ties between delinquents and non-delinquents reduce criminality). Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

32. Some Further reading / lectures • There is a great deal of formal economic modeling of social networks, which I have largely ignored today. Some key papers that articulate or test models include: • Jackson & Watts, The Evolution of Social and Economic Networks, 106 J. Economic Theory 265 (2002). • Jackson & Rogers, Meeting Strangers and Friends of Friends: How Random are Social Networks?, 97 American Economic Review 890 (2007). • Kranton & Minehart, A Theory of Buyer-Seller Networks, 91 American Economic Review 485 (2001). • Karlan et al., Trust and Social Collateral, 124 Quarterly. J. of Economics 1307 (2009). • If you are interested in the quantitative study of social networks and economics (with lots of math), sign up for the free online MOOC course run by Matthew Jackson at Stanford, a leading scholar. https://www.coursera.org/#course/networksonline Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

33. Questions and comments on social Networks, or the china-US comparison? ? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics