I originally posted this in November on the Harvard Business Review blog – this was my first effort for them, after they invited me earlier in the fall – Posted by Bob Massie on November 17, 2008 8:31 AM; Originally posted at Harvard Business Review http://conversationstarter.hbsp.com/2008/11/how_to_anticipate_the_next_wav.html
Five years ago, right after the collapse of Enron, World Com, and the other mega-collapses of the Lost Decade, I attended a somber discussion at Harvard Business School. Three distinguished panelists — Harvey Goldschmidt, at the time a commissioner of the SEC; James Turley, the chairman and CEO of KPMG; and Professor Krishna Palepu, director of the HBS Division of Research — spent more than an hour before an audience of several hundred concerned business leaders dissecting two questions.
First, how could these collapses have happened? And second, why didn’t people perceive it in advance?
At the end of the discussion, I asked a question from the floor. Were we not neglecting a third, equally important question: what huge, hard-to-see and potentially threatening wave was roaring towards us at that very moment?
The question did not inspire much discussion, though in retrospect we all can think of emerging tsunamis that later emerged — from wobbly securitization and ballooning credit default swaps to erratic energy demand and deepening climate risk — that have damaged our economy.
What lessons can we draw from this repetitive myopia to which we are all inclined? More specifically, how can we learn to anticipate what lies around the next bend in the road?
First, we should acknowledge that capitalism oscillates between two conflicting convictions. We believe that the future will be like the past and that change is inevitable.
Too often when markets run into problems, we start off with the first assumption. We treat market malfunctions as isolated symptoms– a momentary cold rather than a chronic illness. Only after the symptoms recur — again, again, and again — do we start to accept that there may be a pattern. Then we suddenly switch, often abruptly, to the second view: we are in the midst of a sea-change.
Statisticians want us to believe that behaviors all revert to the mean. Entrepreneurs want us to believe that the past is irrevocably being left behind. Efficient market theorists tell us the prices embody all available knowledge. Scientists tell us that knowledge is constantly being expanded and rewritten. So what is a leader interested in the future to do?
Second, to predict the future, we paradoxically need to read more about the past. Only by learning about how societies have pivoted rapidly in response to new ideas and changing material conditions can we learn to detect such patterns early.
For example, when I was a high school student, the single greatest certainty in American foreign policy — the assumption from which all other predictions flowed — was that Communist totalitarianism would be a permanent feature of the world map. There would always be a Soviet Union, and, by extension, a Warsaw Pact, a Cold War. Our military, political, diplomatic, and commercial policies all flowed from this inescapable certainty. And this view was maintained until just a few months before the fall of the Berlin Wall.
To go back a bit farther, it’s difficult to remember that New England, now almost entirely represented by Democratic elected officials, was once a vast and unassailable Republican peninsula. Or that the American South was made up for nearly a century of right-wing, states-rights, white supremacist Democrats — members of the same party that gradually morphed, from Wilson to Roosevelt and from Kennedy to Clinton, into the one that just nominated and elected an African-American president.
More strange twists and turns in our national and international economy lie ahead. We know that our capital markets failed us because they didn’t capture important underlying forms of value — but we don’t know what they will be replaced by. We know that we are witnessing deep structural changes in the global economy — through the globalization of information and trade, through climate change and population growth — but we don’t yet know how these pieces will interconnect. We know that big pieces of the wisdom we have inherited about how the world works don’t apply any more — but we don’t know which ones.
Instead of paddling around in circles as though we were in some calm lake, we need to learn to act like surfers — to place ourselves in the rising and falling swells, paddling forward while glancing occasionally backwards, so that we will be ready when the big wave comes. If we do that, we will stand up at the right moment, establish our balance, take a deep breath, and ride the exhilarating force of history all the way to shore.
Bob Massie has been a leading innovator in the fields of investment, finance, corporate responsibility and global strategy. Having received his doctorate from Harvard Business School in 1989, he has been, at different moments in his career, a professor, minister, historian, author, and statewide political candidate. The former executive director of Ceres and the co-founder of the Global Reporting Initiative, Massie is currently an advisor to many organizations and entrepreneurial projects around the world.