Learning in social networks: Selecting profitable choices among alternatives of uncertain profitability in various networks

Abstract

Social capital theory assumes that information is valuable. However, only rarely is this value explicitly modeled, and there are few examples of empirical tests of mechanisms that connect social network structure to valuable information. We model an individual decision problem in which individuals make choices that yield uncertain outcomes. The individuals can learn about the profitability of options from their own choices and from the network. We generate computer-simulated data to derive hypotheses about the effect of network characteristics on making profitable choices. We conduct a laboratory experiment to empirically test these hypotheses and find that, at the individual level, degree centrality has a positive effect on making profitable choices whereas betweenness centrality has no effect. At the network level, density has a positive effect on making profitable choices, whereas centralization does not have an effect.