Path dependence is when the decisions presented to people are dependent on previous decisions or experiences made in the past.[1]
Path dependence exists when a feature of the economy (institution, technical standard, pattern of economic development etc.) is not based on current conditions, but rather has been formed by a sequence of past actions each leading to a distinct outcome.[2]
In economics and the social sciences, path dependence refers to either the outcomes at a single point in time, or to long-run equilibria of a process. In common usage, the phrase implies either:
- that "history matters"—a broad concept,[3] or
- that predictable amplifications of small differences are a disproportionate cause of later circumstances, and, in the "strong" form, that this historical hang-over is inefficient.[4]
In the first usage, (A), "history matters" is true in many contexts; everything has causes, and sometimes different causes lead to different outcomes. This can more simply be explained as "the future development of an economic system is affected by the path it has traced out in the past".[5] However, in these contexts the direct influence of earlier states may not be notable as contemporary conditions override past processes,[6] unlike "path-dependent" options in finance, where the influence of history can be non-standard.
It is the narrow concept (B), that has the most explanatory force.
Positive feedback mechanisms, like bandwagon and network effects, are at the origin of path dependence.[7] They lead to a reinforcing pattern, in which industries 'tip' towards one or another product design. Uncoordinated standardisation can be observed in many other situations.
https://en.wikipedia.org/wiki/Path_dependence
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