Maximus Decimus Meridius, the fictitious character of the movie Gladiator (2000) certainly got it right when he asserted “Brothers, what we do in life… echoes in eternity”. Albeit not referring to innovation or development, his assertion certainly points to the concept of path dependence: the easy direction to take by following the decisions others have taken in the past. Indeed, it’s quite an eye-opener to see how Roman roads constitute practically a blueprint for their current European counterparts. Even more peculiar is to observe those alternatives to official routes, and quite often much more functional ones, which are created in natural spaces by walkers’ footprints, commonly known as ‘desire paths’. Can we elude the path of dependence when it comes to investing? Why is understanding trends critical?
Why is the path of dependence?
Path dependence refers to a research design that takes into account that “what is happening now depends on the decisions taken in the past”, says Lorenzo Maggiorelli an expert in the field and Associate Professor at Tadeo Lozano University (Colombia). If such analyses are important when studying history, they are equally so when it comes to designing the future. In other words, we need to establish what to do today to ensure what we want to happen in the future (utopia).
The QWERTY keyboard is a prime example. Early on, there were a host of different typewriter designs, with the one placed in front of the ribbon eventually winning out. This layout was directly replicated by the first computers (because it was much easier than having to design a new one). Likewise, when the smartphone came along, it followed the same design. We had fallen into a technological lock-in.
A path dependence that ensnares: the "lock-in"
Why is path dependence important to study? Because a strong path dependence in terms of innovation can lead to a state called lock-in, a situation in which taking the best path becomes too difficult owing to how well trodden our path has become. Path dependence is a phenomenon that also arises in the economy when, without paying heed to current conditions, we trust in past habits, actions and decisions to get a particular outcome. According to Wall Street Mojo specialists, the finance, accountancy and investment educational sources portal, sticking to a traditional path “is not always the ideal strategy because it restricts decision-making and inhibits growth”.
Carbon emissions provide us with a clear example, with respect to which, according to some researchers, “lock-ins and path dependencies currently reinforce and stabilize unsustainable policies, institutions, infrastructure, and practices,” when it comes to considering alternatives to sustainable mobility.
Path dependence analysis enables us to consider innovating, or not, with respect to certain technologies. Example: all current investment in synthetic fuels will lock humankind into the combustion engine for several more decades. This is known as ‘technological pigeonholing’.
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