The Rogers Diffusion Curve for innovation has been used as a clear description for how new ideas and products permeate through the economy. Innovation is communicated through time in a regular process through a different set of users from innovators, early adopters, early majority, late majority, and finally laggards. The bell-shaped curve translates to a logistic function which shows the speed of adaptation for any innovation. Diffusion or the evolution of ideas and technology may have different speeds, but it always follows this same narrative.
Without going into all the details of the diffusion curve and how it will differ across technologies and products, we can easily say that there is a diffusion of ideas within finance and investing.
We can think about this diffusion on two levels for finance and investing. There is the diffusion of ideas in finance like the CAPM or optimization which is the acceptance and use of new research ideas. There is also the diffusion of news, ideas, themes, and valuation through the market.
News can follow the diffusion curve as early adaptors of new information or valuation put on trades which are then followed by others. A news announcement can have early adopters then followed by the majority and finally laggards. Themes can develop across markets with first some early adaptors and then the majority. New ideas and different valuations can also follow a diffusion curve until the laggards join and there is then a new idea. Every idea, very piece of news, and every theme has a life cycle and the job of most traders and portfolio managers is the find out how to join the diffusion curve early.
Even trend-followers follow the diffusion curve. they may not be innovators or early adaptors but there is the hope that the trend can be found before the peak between the early and late majority. Part of what makes an effective trend model is being able to be early in the diffusion curve and exiting before all the laggards join the market.
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