Something I have come across recently is signalling theory. Part of the theory (as I understand it) is that humans communicate almost entirely through conventional signals where there is no inherent cost if communication is dishonest or not (compare a ‘natural’ signal such as one antelope communicating to its cohorts that there is a pack of hunting lions nearby – the costs to the ‘honesty’ or otherwise of this signal are immediate and extremely high). Signalling theory says that the costs of deception must be high enough to keep signals within the expected range of honesty of signallers and receivers.


Studies of how social networks work by the sociologist Granovetter have suggested that lots of weak ties in a large network are best for the free-flow of information, but that clusters of strong ties may be better for getting jobs done where intense effort is required.


Following on from my post yesterday about trust and social networks, perhaps signalling theory and Granovetter’s work can tell us something about why the financial system recently broke down? For example, perhaps the costs of deceptive signalling are too cheap in large networks of financial workers? Perhaps the very fact of trading in derivatives that nobody really understands encourages a culture where deception is accepted as the norm (with the ‘irrational’ discounting of future consequences beloved of behavioural economists compounding matters)? Perhaps the networks that structure international finance are geared to the fast-flow of information rather than close ties that ensure intense effort and scrutiny?


These are open questions but it is clear that how companies and institutions organise themselves in terms of network size and composition is something that is very complex and demands a lot of thought and planning. And it seems to me that there is a distinct lack of awareness of this fact.