Social network valuation with logistic models

This is a logistic growth model for Facebook’s user base, with a very simple financial projection attached. It’s inspired by:

Quis pendit ipsa pretia: facebook valuation and diagnostic of a bubble based on nonlinear demographic dynamics

Peter Cauwels, Didier Sornette

We present a novel methodology to determine the fundamental value of firms in the social-networking sector based on two ingredients: (i) revenues and profits are inherently linked to its user basis through a direct channel that has no equivalent in other sectors; (ii) the growth of the number of users can be calibrated with standard logistic growth models and allows for reliable extrapolations of the size of the business at long time horizons. We illustrate the methodology with a detailed analysis of facebook, one of the biggest of the social-media giants. There is a clear signature of a change of regime that occurred in 2010 on the growth of the number of users, from a pure exponential behavior (a paradigm for unlimited growth) to a logistic function with asymptotic plateau (a paradigm for growth in competition). We consider three different scenarios, a base case, a high growth and an extreme growth scenario. Using a discount factor of 5%, a profit margin of 29% and 3.5 USD of revenues per user per year yields a value of facebook of 15.3 billion USD in the base case scenario, 20.2 billion USD in the high growth scenario and 32.9 billion USD in the extreme growth scenario. According to our methodology, this would imply that facebook would need to increase its profit per user before the IPO by a factor of 3 to 6 in the base case scenario, 2.5 to 5 in the high growth scenario and 1.5 to 3 in the extreme growth scenario in order to meet the current, widespread, high expectations. …

(via the arXiv blog)

This is not an exact replication of the model (though you can plug in the parameters from C&S’ paper to replicate their results). I used slightly different estimation methods, a generalization of the logistic (for saturation exponent <> 1), and variable revenues and interest rates in the projections (also optional).

This is a good illustration of how calibration payoffs work. The payoff in this model is actually a policy payoff, because the weighted sum-squared-error is calculated explicitly in the model. That makes it possible to generate Monte Carlo samples and filter them by SSE, and also makes it easier to estimate the scale and variation in the standard error of user base reports.

The model is connected to input data in a spreadsheet. Most is drawn from the paper, but I updated users and revenues with the latest estimates I could find.

A command script replicates optimization runs that fit the model to data for various values of the user carrying capacity K.

Note that there are two views, one for users, and one for financial projections.

See my accompanying blog post for some reflections on the outcome.

This model requires Vensim DSS, Pro, or the Model Reader. facebook 3.vpm or facebook3.zip (The .zip is probably easier if you have DSS or Pro and want to work with the supplementary control files.)

Update: I’ve added another set of models for Groupon: groupon 1.vpmgroupon 2.vpm and groupon.zip groupon3.zip

See my latest blog post for details.

 

Forest Cover Tipping Points

This is a model of forest stability and transitions, inspired by:

Global Resilience of Tropical Forest and Savanna to Critical Transitions

Marina Hirota, Milena Holmgren, Egbert H. Van Nes, Marten Scheffer

It has been suggested that tropical forest and savanna could represent alternative stable states, implying critical transitions at tipping points in response to altered climate or other drivers. So far, evidence for this idea has remained elusive, and integrated climate models assume smooth vegetation responses. We analyzed data on the distribution of tree cover in Africa, Australia, and South America to reveal strong evidence for the existence of three distinct attractors: forest, savanna, and a treeless state. Empirical reconstruction of the basins of attraction indicates that the resilience of the states varies in a universal way with precipitation. These results allow the identification of regions where forest or savanna may most easily tip into an alternative state, and they pave the way to a new generation of coupled climate models.

The paper is worth a read. It doesn’t present an explicit simulation model, but it does describe the concept nicely. I built the following toy model as a loose interpretation of the dynamics.

Some things to try:

Use a Synthesim override to replace Forest Cover with a ramp from 0 to 1 to see potentials and vector fields (rates of change), then vary the precipitation index to see how the stability of the forest, savanna and treeless states changes:


Start the system at different levels of forest cover (varying init forest cover), with default precipitation, to see the three stable attractors at zero trees, savanna (20% tree cover) and forest (90% tree cover):

Start with a stable forest, and a bit of noise (noise sd = .2 to .3), then gradually reduce precipitation (override the precipitation index with a ramp from 1 to 0) to see abrupt transitions in state:

There’s a more detailed discussion on my blog.

forest savanna treeless 1f.mdl (requires an advanced version of Vensim, or the free Model Reader)

forest savanna treeless 1f.vpm (ditto; includes a sensitivity file for varying the initial forest cover)

Gumowski-Mira Attractor

I became aware of this neat model via the Vensim forum. I have no idea what the physical basis is, but the diverse and beautiful output it generates is quite amazing.

Interestingly, if you only looked at time series of this sequence, you’d probably never notice it.

This runs in any version of Vensim. gumowski mira.mdl

A note on the bathtub analogy

Adapted from “A note on the bathtub analogy,” Pål Davidsen, Erling Moxnes, Mauricio Munera Sánchez, David Wheat, 2011 System Dynamics Conference.

Abstract

The bathtub analogy has been used extensively to illustrate stock and flow relationships. Because this analogy is frequently used, System Dynamicists should be aware that the natural outflow of water from a bathtub is a nonlinear function of water volume. A questionnaire suggests that students with one year or more of System Dynamics training tend to assume a linear relationship when asked to model a water outflow driven by gravity. We present Torricelli’s law for the outflow and investigate the error caused by assuming linearity. We also construct an “inverted funnel” which does behave like a linear system. We conclude by pointing out that the nonlinearity is of no importance for the usefulness of bathtubs or funnels as analogies. On the other hand, simplified analogies could make modellers overconfident in linear formulations and not able to address critical remarks from physicists or other specialists.

See my related blog post for details.

Units balance.

Runs in Vensim (any version): ToricelliBathtub.mdl ToricelliBathtub.vpm

Delay Sandbox

There’s a handy rule of thumb for estimating how much of the input to a first order delay has propagated through as output: after three time constants, 95%. (This is the same as the rule for estimating how much material has left a stock that is decaying exponentially – about a 2/3 after one lifetime, 85% after two, 95% after three, and 99% after five lifetimes.)

I recently wanted rules of thumb for other delay structures (third order or higher), so I built myself a simple model to facilitate playing with delays. It uses Vensim’s DELAY N function, to make it easy to change the delay order.

Here’s the structure:

Continue reading “Delay Sandbox”

Fibonacci Rabbits

This is a small, discrete time model that explores the physical interpretation of the Fibonacci sequence. See my blog post about this model for details.

Fibonacci2.vpm This runs with Vensim PLE, but users might want to use the Model Reader in order to load the included .cin file with non-growing eigenvector settings.

Oscillation from a purely positive loop

Replicated by Mohammad Mojtahedzadeh from Alan Graham’s thesis, or created anew with the same inspiration. He created these models in the course of his thesis work on structural analysis through pathway participation matrices.

Alan Graham, 1977. Principles on the Relationship Between Structure and Behavior of Dynamic Systems. MIT Thesis. Page 76+

These models are pure positive feedback loops that don’t exhibit exponential growth (under the right initial conditions). See my blog post for a discussion of the details.

These are generic models, and therefore don’t have units. All should run with Vensim PLE, except the generic gain matrix version which uses arrays and therefore requires an advanced version or the Model Reader.

The original 4th order model, replicated from Alan’s thesis: PurePosOscill4.vpm – note that this includes a .cin file with an alternate stable initialization.

My slightly modified version, permitting initialization with different gains at each level: PurePosOscill4alt.vpm

Loops of different orders: 3.vpm 6.vpm 8.vpm 12.vpm (I haven’t spent much time with these. It appears that the high-order versions transition to growth rather quickly – my guess is that this is an artifact of numerical precision, i.e. any tiny imprecision in the initialization introduces a bit of the growth eigenvector, which quickly swamps the oscillatory signal. It would be interesting to try these in double precision Vensim to see if I’m right.)

Stable initializations: 2stab.vpm 12stab.vpm

A generic version, representing a system as a generic gain matrix, so you can use it to explore any linear unforced variant: Generic.vpm

Rental car stochastic dynamics

This is a little experimental model that I developed to investigate stochastic allocation of rental cars, in response to a Vensim forum question.

There’s a single fleet of rental cars distributed around 50 cities, connected by a random distance matrix (probably not physically realizable on a 2D manifold, but good enough for test purposes). In each city, customers arrive at random, rent a car if available, and return it locally or in another city. Along the way, the dawdle a bit, so returns are essentially a 2nd order delay of rentals: a combination of transit time and idle time.

The two interesting features here are:

  • Proper use of Poisson arrivals within each time step, so that car flows are dimensionally consistent and preserve the integer constraint (no fractional cars)
  • Use of Vensim’s ALLOC_P/MARKETP functions to constrain rentals when car availability is low. The usual approach, setting actual = MIN(desired, available/TIME STEP), doesn’t work because available is subscripted by 50 cities, while desired has 50 x 50 origin-destination pairs. Therefore the constrained allocation could result in fractional cars. The alternative approach is to set up a randomized first-come, first-served queue, so that any shortfall preserves the integer constraint.

The interesting experiment with this model is to lower the fleet until it becomes a constraint (at around 10,000 cars).

Documentation is sparse, but units balance.

Requires an advanced Vensim version (for arrays).

carRental.vpm carRental.vmf