Network Effects & Investor Behavior

The network effect makes the outcome of our decisions and actions uncertain to an extent that the actual outcome could be the opposite of the intended one. The first clearly visible signs of trouble in sub-prime mortgages surfaced in early 2006. Were it not for the network effect, we could isolate the banks with subprime exposure, write down those assets and limit the impact of the event. Instead, the whole system stopped functioning since nobody was certain about the full knock-on effect on the counterparties. The systemic crisis ensued.