Investments on a Rugged Landscape: The Effect of Investor Population, Network Structure, and Complexity on Technological Change: An Agent-Based Simulation

In this paper, we investigate which characteristics of technological and financial systems might be conductive for technological change. We are particularly in how the interplay between capabilities, resources and networks among investors with the complexity and maturity of technologies affect the rate and direction of investments in potential innovation projects. To do so, we present an agent-based simulation model of technology investment by heterogeneous financial agents connected in a co-investment network. We model these agents as to observe emerging technologies on a technology “fitness landscape”, and select potential investment targets according to their perceived risk-adjusted returns, where risks are a function of the technology’s maturity and the returns of
the achieved technology fitness. Subject to imperfect information and bounded rationality, financial agents are heterogeneous in their (i.) their position and “search radius” on the landscape, determining the potential investment targets they are able to spot, and (ii.) “forecasting ability”, determining the accuracy of their prediction of achievable technological fitness. We observe which population of financial agents lead to high rates of technological change and diversity, and prevents technologies from getting stuck in the financial “valley of death”. In a next step, we introduce investor networks and allow agents to co-invest together in order to pool financial resources and get access to their
forecasting capability in a specific technological domain. We compare which investor network structures lead to the high rates of technological change and diversity on a given technology landscape. Results from a Monte Carlo simulation indicate networked investor population to outperform the
case of isolated stand-alone investors, in terms of investor benefits as well as achieved technological change. Yet, we also find evidence for the existence of a financial “valley of death” - a certain stage in the technology life-cycle where its characteristics discourage further investments, thereby making the technology likely to “die” due to underinvestment. While encouraging investments in early
stages, the effect of co-investment networks does not prevent this phenomenon to occur.