Revisiting some thoughts on how the world got into such a mess a few years ago… and what may be happening all over again!

(originally published in August 2015 – republished because I think it is important to think about)

To call it a conspiracy would imply some type of intent to destroy the world was behind it – and such an intent is something that did not exist. To call it a “Black swan” event (as some have) would imply that it was unforeseeable – and unforeseeable it certainly was not, since this kind of thing had happened many times before. To call it a repeat of history is probably the most accurate description of the bubble that upon bursting has sent the bulk of the developed world to its knees economically. It could also be described as the most lethal combination for unintended consequences the world economy has seen – a mix of events and influences so toxic that it looks like generations are going to be paying for it for years to come. Perhaps the main difference between this crisis and those that went before is its spread. The width of impact is astonishing with many ripple effects only starting to be felt a number of years after the bubble burst. The world is a smaller place than ever before due to the connectedness that technology has facilitated. The analogy of dropping a stone in a pond is one that comes to mind. In the past each crisis was isolated to the extent that it was like throwing a stone in an ocean – the ripples spread but never too far. Today’s economic world is far more like a pond than an ocean – drop a stone in a pond and the ripples effect the entire pond, and often rebound creating a second or third disturbance. This is what seems to be happening with the current crisis. Each new effect seems to trigger off a second, third or fourth round of ripples that effect the entire globe – no-one is immune.

There are a number of excellent and very detailed accounts of the Financial Crisis and there are bound to be many that follow. Here I simply want to provide an overview of the events and highlight the key areas of leakage in the system due to a lack of leadership, strategy and governance.

Certain key factors seem to have identified as critical to the Financial Crisis, these are;

  • Lack of understanding related to complex systems and an Inadequate understanding of the risk of “connectedness” – related to the complexity of the current economic systems;
  • Poor risk governance at every level, national, corporate and individual;
  • Unethical leadership;
  • Misaligned Incentives, again at every level national, corporate and individual;

The nature of today’s world is that it is connected – and “connectedness” is far more than just being able to keep in touch. Certainly communication was the primary driver of connectedness but it did not end with communication. Communication is simply a facilitator and the real nature of connectedness is that it now pervades not only business communications but also business systems and business models. The assumption was that the old ways of doing business would be able to handle this new type of connectedness. As we know they could not.

Connectedness increases complexity significantly – and it was this complexity that was not very well understood. Complexity is one of the biggest problems of the modern market! Complex systems are defined as those systems that comprise a large number of elements or components, these elements interact on a continual basis – the outcome (or overall effect) of the system is determined by the interaction, effects and counter effects within the system. Complex systems are not all alike – there is another characteristic that is perhaps more important to understand. Complex systems are either tight or loose. What I mean by this is that there are some extremely complex systems, which while comprising many elements do not get impacted that significantly by the problems they face simply because there is looseness (in both time and space) to intervene in the system and address the problems before the actual impact of the problem spreads, and is possibly magnified, throughout the system. A complex system that is tight is one where this ability to intervene does not exist.

Some examples will help clarify this. A good example of a complex system that is loose would be an educational institution like a university. There are certainly a huge number of elements that interact to produce the desired outcome of good quality education. Should something go wrong the nature of a university is that intervention is possible “between” the various components. In a sense there is a gap between each of the cogs in the university apparatus. A complex and tight system is more like an assembly line where each cog in the machinery of the assembly line is tightly coupled to the next – should there be a problem the only way to prevent it from spreading throughout the entire system would be to shut down the assembly line, with an obvious impact on the outcome, to fix the problem. As the looseness or tightness of a system is related to the ability of an entity to respond this difference is similar to the difference between people and animals. In any situation where there is a stimulus that requires a response people have the ability to choose their response in the gap between stimulus and response. In most animals the response is “hardwired” into their makeup – it is a matter of instinct, they have little or no ability to choose their response , there is little or no gap between stimulus and response for them.

There is a further challenge in many tight complex systems. As discussed above the primary result of problems in these systems is the inability to prevent the spread of these problems without actually shutting down the system – the assembly line example, and shutting down the system impact significantly the outcomes the system is designed to achieve. There are some systems however that cannot be shut down. Take for example an aircraft – should it experience a problem in mid-flight it is simply not possible to shut it down to address the problem. (This seems to have been the problem with the Malaysian aircraft currently missing).

The nature of most of the systems described above is that they were designed – there was intentionality about the system and it is against this intention that the outcome can be measured. The outcome is an intended one – it is anticipated up front. There are however systems that are not specifically designed and so there is not specific intention to the outcomes they produce. In a sense there is no ability in these systems to anticipate…

It looks like a lot of this is happening all over again – will we ever learn?

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