What is Path Dependence?

Malcolm Tatum

Path dependence is a process that helps to define how a given set of decisions or actions that is currently under consideration is influenced by actions or decisions that were made in the past. This is true even if the original rationale for those past decisions is not longer applicable. At the root of path dependence is the understanding that what has taken place before has a lot to do with how things are today, and as such establishes some groundwork for making decisions about what will happen in the future.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

In actual application, path dependence may refer to the ramifications associated with a single decision or event that occurred in the past, and how that event has placed some limits or parameters on what will happen in the future. The concept can also be applied to a range of past events or decisions that have shaped today’s circumstances and thus provided the starting point for making future decisions. In both scenarios, the direct or indirect impact of the past on decisions that must be made today is considered important.

An example of path dependence within a business setting could involve understanding how the decision to sell a specific product at some point in the past has led the company to its current circumstances. Assuming the decision to sell that product was a good one, there is a good chance that the decision led to greater profits, higher recognition within the industry, and the development of a loyal customer base. If changes in technology are occurring which threaten to render that product obsolete within the next five years, the business must consider the ramifications of continuing to produce that product, both the benefits and the liabilities. At the same time, the company will need to consider the historical data on hand to determine if there is a high probability that the popularity of the brand name would allow the business to develop new products that would incorporate the emerging technology.

With this example, path dependence indicates that the company became established and flourished due to specific decisions that were made in the past. Now, the options for future growth are limited by what has gone on before. In most cases, simply ceasing to produce its signature product is not an option. Slowly phasing it out while introducing a new product that is likely to also appeal to the same customer base may be possible. Riding the wave until demand for the product disappears, then beginning to develop and sell new products is also a possibility. The company will have to choose the course of action that is most likely to produce the desired result, even while continuing to work within the parameters set by past decisions.

While path dependence is somewhat limiting, this situation also helps to establish boundaries that can simplify the decision making process for the future. By recognizing those limits, it is possible to explore each viable option, project the most likely result of pursuing each option, and ultimately deciding on the course of action that is most likely to produce the desired result. While allowing for path dependence does not automatically ensure future success, it can help a business avoid repeating past mistakes and increase the chances of remaining in operation for a longer period of time.

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