The research group Gartner tried to prove the potentially positive outcomes of bubbles in its theory of the “hype cycle”, in which mass adoption of any product begins with a “technology trigger” that generates significant interest. This leads to a “peak of inflated expectations”. When reality fails to live up to these hopes, the industry enters a “trough of disillusionment” in which many businesses leave. Those that remain continue through to a “slope of enlightenment” in which a more practical understanding of the technology’s potential is reached. The final stage is the “plateau of productivity”.

One key factor missing from Gartner’s analysis is capital. The surge to the “peak of inflated expectations” can only occur if capital is cheap and freely available. And this is a key point to remember when analysing the hedge fund bubble of 2008.

The Gartner Hype Cycle was created to analyse technology innovations progress through their markets from an adopters point of view. While we are always very happy to see its use extended to other fields, it is not a general economic theory about bubbles and we would not wish to give that impression. We are not economists.

Mr. Smith makes a good point about the availability of capital. While the hype cycle will be in play for even the simplest and cheapest of innovations, its magnitude can certainly be amplified considerably by freely available capital. The dot com bubble is the most obvious example. The Silicon Valley funding of web 2.0 is another.

Hedge funds are not a new invention; they have been around since the early 1950s. Forbes Invstopedia suggests there was a hedge fund boom peak in 1968, followed by a crash in 73-4, then another boom in the 90’s which saw a major fallout in the early 2000s. So we have just passed through a third wave.  It therefore seems likely hedge funds form a repeated cyclical, or boom-bust investment market, like property, that rises and falls repeatedly.  Over the medium term (perhaps 5 to 10 years) this can sometimes be mistaken for a hype cycle. We have noted the difference before in this Blog.   In the Hype Cycle two underlying curves create the shape: the social excitement bell curve plus the innovation performance maturity S curve. It is not obvious that hedge funds in their current form are a new invention, maturing in their technical performance, in this decade.

So on balance, it seems unlikely that the Hype Cycle model can be applied to the current situation of the hedge fund industry. However it is possible that the hype cycle applies to some financial instruments – where they are genuinely novel innovations. For example, as we have raised in this blog previously, it is possible that the Hype Cycle applies to the instrument at the epicenter of this recession – the CDO.

I am certainly no expert in financial investment vehicles. So if anyone cares to expand on this debate, I would be very happy to hear from them.

It is not clear whether the hype cycle can be applied to the expectations people have of politicians – though we have noticed a couple of recent attempts.  For example people have tried a Sarah Palin hype cycle and a Gordon Brown hype cycle , the latter – evidenced with data:

HC-like curve for UK Prime Minister Gordon Brown

There is undoubtedly a rush of social expectation, exaggerated by marketing, for a new leader. The question is whether the usual underlying progress curve is S shaped for a politician. It is always a combination of the bell shaped social expectation curve added to an S shape progress curve that yields the hype cycle. We explain how this works in Chapter 2 of the book – ‘Behind the Hype Cycle’.

Do leaders usually recover from initial disappointment? Gartner analysts study technology innovations and markets, we are not qualified political pollsters or sophologists – so we can’t say.  Of course we would be thrilled if the HC curve really was useful in another domain. Do you have a view on its applicability ?

• Top of the list is the wonderful music rendition and video montage “Here Comes Another Bubble” from the Richter Scales, looking at the the Web 2.0 investment bubble.
• A YouTube video short from ‘dpcumbrella‘ features the ups and downs (quite literally) of humanoid robots, Windows 98 and other technological wonders.
• Let’s not forget Gartner’s own corporate hype cycle video explaining the relevance of the hype cycle to a business audience.

Happy viewing!

One example pointed out by Jamais Cascio is the uncanny valley that happens when artificial humans (chatbots, avatars, robots, aminated movies) get so close-to-but-not-quite-real as to be spooky (like the movie The Polar Express), before they cross into indistinguishable realism.

At least the uncanny valley is based on human reactions.  Others are even more of a stretch, like this reply (by “randy”) to TechCrunch’s posting of the emerging technologies hype cycle:

“Curve looks like CO2 fluctuation, over the last 500 million years:“

The human brain is just wonderful at this pattern recognition thing – where else have you seen hype cycles when you weren’t even looking?

With that in mind, I enjoyed this visual commentary on the real-estate boom/bust cycle, which ‘Realty Bites’ blogger Michael Kupritz kindly points out is NOT a Gartner hype cycle. Nice one Mike.

So while there might be a CDO innovation Hype Cycle, the real-estate market follows a longer term repeat pattern.

Home Price Cycle

In writing the section on fads for Mastering the Hype Cycle, we had the same challenge in identifying examples of fads that fell off the hype cycle altogether. To fall off in this way, an innovation needs to be totally devoid of any value that can pull it out of the Trough and on to eventual productivity. One of the collective intelligence panelists suggested “push technology” as an example of a fad. Push did indeed experience a classic Peak of Inflated Expectations, but we view it as an example of a full hype cycle rather than a fad. Although the specific technological approach didn’t last, the goals and ideas of push technology formed the underpinnings of RSS and related capabilities today, and many of us have virus updates pushed to our PCs on a regular basis.

But surely if we stretched beyond technology examples and looked toward the fickle world of pop culture we could find some suitable case studies? An early draft of the book had the following set of (wonderfully alliterative, I thought) examples: “Hype without substance is destined to end up in the wasteland of obscurity along with pet rocks, Pokemon cards, CB radio and the Spice Girls.” My co-author Mark immediately pointed out that his son was a fan of all things Pokemon, and that the cards had in no way faded into obscurity. Although the number of kids prepared to shell out $50 for a holographic Charizard has shrunk dramatically since the heady days of 1999 and 2000, when millions of kids blew billions of dollars on the cards, there remains a devoted following. On a later reading, Mark also expressed a concern that we might be descended upon by hordes of outraged truckers if we suggested that CB radio was just a fad.

That left us relatively safe with the Spice Girls and pet rocks. Or so we thought. Just before the final edits, the Spice Girls announced their reunion tour and another fad rose from the dust. The fad example sentence was published as the sadly abridged “Hype without substance is destined to end up in the wasteland of obscurity, strewn alongside a collection of Pet Rocks.”

We probably could have found another couple of examples by scouring the fashions of past decades – fuzzy dice? outsized shoulder pads? – but we would just as likely have discovered a small but dedicated fan club who found some enduring attraction in each phenomenon. It seems that the Wasteland of Obscurity is far from deserted, but is populated with roving bands of loyal fans, each preserving and perpetuating a shared obsession. Even a small amount of value – whether from the actual innovation or from the social bonding surrounding it – keeps the nichest of fads alive, and the long tail grows ever longer.