Information cascades, structural change and public sector governance

Information cascades, structural change and public sector governance

I have recently been reading The Wisdom of the Crowds – a book by James Surowiecki.

In particular I found the experiment devised by economists Angela Hung and Charles Plott (p. 64) interesting and will test it out in a classroom on some appropriate occasion myself. The experiment is a good tool to visualise concepts like imperfect information and information cascades.

Two boxes both containing marbles are put on top of a desk. One box has twice as many white marbles compared to black marbles and the other box twice as many black marbles compared to white marbles (you can choose any colour off course).  Information is imperfect, because every third marble in a box is of a different colour.

The students are told the above, but they are not told which box is which. One box is picked and then the students are asked to pick up a marble, to have a look at it, but not to show it to others. The students are asked one by one to guess whether the box contained more black marbles or more white marbles. If you have a black marble in your hand and three students prior to you have guessed that the box contains more white marbles than black marbles, would you not change your opinion and perhaps guess that the box has more white marbles? The situation in which you rely more on the collective view than in your own information is known as an information cascade.

In the early stages of this millennium in around 2004 a common view in Finland was “what is good for Nokia is good for Finland”. I would argue that this was an information cascade. At the time Nokia was doing well and it naturally had a lot of lobbying power in Finland.

During the same time i.e. in 2004, I began to question the logic of transaction based pricing, which was the dominant logic on the mobile, but did not exist on the Internet. Indirectly and sometimes very directly, I was questioning the business model of Nokia. My personal experience and feeling from the time was that thinking which questioned Nokia, was not allowed. In particular, I felt, that it was not allowed at the Helsinki University of Technology at which I was working with my PhD thesis (present Aalto University).  I walked out from the Helsinki University of Technology and argued my thesis in Oulu University. My experience off course is very subjective.

Learning from the experience, however, I would argue that information cascades can be dangerous because they clearly can create a bias and can lead to situations where what one can think or say becomes limited. The Emperor´s New Clothes – a fairy tale by Hans Andersen, is only a step away. I would even go as far as to argue that we Finns are “a country of cascading information networks” - a feature which is present also in the international term Finlandization. In Finland we value consensus. With consensus we have a strong sense of direction. However consensus built on cascading information can be a dangerous choice.

Information is power and value is created to an increasing degree through information. It makes sense not to tell. At the same time openness is one of the buzz words of the information society. It is interesting to note that companies are required to be increasingly more open about their operations although at the same time their businesses are built on creating value through data. Companies have to find a balance between an increasing amount of data, creating value through data and with the challenges brought on by the demands of openness.

Withholding information can also become a problem. A conflict of interests might arise. For example withholding information could be in your personal interest or in the common interest of you and a few of your colleagues and perhaps not in the interest of your company and its stakeholders. For these reasons we have strict corporate governance principles.  

The public sector has through legislation controlled the private sector. Media has in turn had a role in monitoring the activities of legislators. I am concerned of what will happen in the public sector. On the one hand it will face the challenges of increasing the amount of data and using this data to redesign its operations. The public sector will also face the challenges of structural change. On the other hand the public sector will also face increasing demands for openness. The public sector is over 50% of the gross national product of Finland and I am also somewhat concerned that public sector governance principles are not up to date and that neither social media nor the traditional media have had the tools, including the understanding, to monitor what happens in public sector governance.  

In Finland we have had a case in which the prime minister Jyrki Katainen contracted philosopher Pekka Himanen to make a report on the future of Finland. This study was not open to competition and it also seems that both the Academy of Finland and the Finnish Funding Agency for Technology and Innovation felt pressured into co-financing the study (http://yle.fi/uutiset/tekes_would_have_put_himanen_research_out_to_tender/6512955). In another case there has been public debate on how the government should use ownership control in government controlled companies. The problem pointed out in the editorial of Helsingin Sanomat 16.10.2013 is that this control can be politically motivated. In one case the central party minister pressured the Finnish State Railways to contract railway carriages to ensure employment in the rural area and thus bringing jobs into their constituency. In another case the Finnish minister responsible for government ownership was forced to resign because as a member of the Green party it seems she wanted to protect the Arctic and was actively preventing the ice breakers from implementing their Arctic strategy.

These above actions can be regarded as inappropriate and they have surfaced through the media, including social media and at the end of the day they have had to face the scrutiny of public debate and public opinion. However what if we have seen is only the tip of the iceberg?  It would be foolish to assume that everything is visible or that everything will surface. The Finnish public sector is now facing structural change brought on by the internet i.e. the information age revolution. We do not use the word structural corruption in Finland, but I am sure that some of the established practices, which will emerge during structural change, will bring debate on what can be regarded as good public sector governance principles in the information era.