An option-theoretic model of a reputation network

ABSTRACT This paper constructs a new theory of social networks based on reputation. The model assumes that reputation is an asset and that individuals connect by buying options on the reputation of others. In networking, individuals construct portfolios of call options to leverage the reputations of others and put options to hedge the connections with others. A network then consists of portfolios of reputation options. The option model confers advantages not present in existing models. First, the payoff to connecting is the payoff on a portfolio of reputation options. Second, the network forms as individuals take option positions; the network evolves as individuals adjust those positions. Third, networking strategies become option strategies. The model allows for insights into network structure, the price of connecting and the value of connecting.