The Perfect Innovative Market

Photo courtesy of ©iStockphoto.com/fotosipsak

I’ve been contemplating a concept for a while, struggling to put it into words, and this evening it just dropped into place.

Just as there is a theoretical definition of a ‘Perfect capital market‘, there can be a theoretical definition of a ‘Perfect innovative market‘.  And just as how many capital markets are highly efficient, but perhaps not quite perfect, innovation has become highly efficient (albeit perhaps not quite perfect).

Let me explain.

As defined by ‘The Free Dictionary, by Farlex (Financial Dictionary)’:

Any market in which assets are priced with total efficiency. In a perfect capital market, there are no possibilities for arbitrage. See also: Efficient markets hypothesis, Perfect competition.

I don’t want to get into whether this a ‘perfect’ definition – it’s good enough for me to explain my point.

Again per the ‘The Free Dictionary, by Farlex (Financial Dictionary)’:

A controversial model on how markets work. It states that the market efficiently deals with all information on a given security and reflects it in the price immediately. The model holds that technical analysis, fundamental analysis, and any speculative investing based on them are useless. The model has three forms: weak efficiency, which holds that technical analysis is ineffective, semi-strong efficiency, which holds that fundamental analysis is ineffective, and strong efficiency, which states that even insider information is immediately reflected in the security prices. Investors and academics disagree on how well the model works.

The ‘efficiency’ of innovation

Innovation can be highly efficient – see for example, how ideas are shared and how at any one point in time, almost all  ideas exist and are being exploited:

  • Apps are released at an incredible rate, filling every possible apparent ‘nook and cranny’ in app stores;
  • Discussions (questions, and answers) on Quora seemingly cover all possible dialogues;
  • Dreaming up a new idea today can seem more difficult than ever – you might often, for example, look on the internet, and find that the idea exists already (especially if you are one of those people who want to build the ‘next Facebook’)*

The beauty of this system (similar to capital markets), is that tomorrow is another day, and there can be new ideas (new prices), which factor in new knowledge which didn’t exist yesterday. In particular, ideas are there to be built on, iterated, developed – see my comments on ‘tweaking’ in my post “Where do ideas come from?”.

It’s a well-oiled machine, driven by desire for success and reward, capability and creativity, and basic human needs/motivators (purpose, autonomy and mastery – reference ‘Drive’ by Daniel Pink).

Of course ‘innovation’ isn’t perfect – it would be pessimistic (or overly optimistic, depending on your standpoint), or simply silly, to assume that all ideas today are fully exhausted, and that there can be no new ideas. But when you look on the internet, and you hear of new ideas that are being executed, you can very quickly get a feeling that with almost no delay, new ideas are immediately thought up.

Interestingly, just as proponents of capital market efficiency say that stock prices can’t be predicted based on past performance (since the current price is said to reflect all investors’ current knowledge of the stock), future innovations can’t be predicted based on past innovations (otherwise the innovation would exist already).

Innovators beware!

Don’t let this get you down, or deter you from coming up with new ideas – as said before, there continue to be opportunities for new innovators for two main reasons:

  • innovation isn’t perfect (even if it feels like it), and
  • tomorrow is another day, and new ideas will certainly appear.

Best of all, just as the efficiency of capital markets is “controversial”, so too can be the “efficiency” of innovation (I see the irony that this places on my blog post, but I’ve made my point now!)

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