We will look back on these tumultuous days in wonder.  To me, in my late 40s, the depth and breadth of volatility in the financial markets reminds me most strongly of the sudden end of the communist regime in East Germany, the tearing down of the wall and the tumbling of communist governments across Eastern Europe.  While the speed of change is different, there is a similar sense of historic fundamentals being swept away as if they meant nothing.  There's also the deeply uncomfortable question "what next?"  It's uncomfortable because we used to be able to be certain about fundamental truths, like stock markets don't fall and rise 8-10% in a single day, huge institutions like AIG don't collapse practically overnight, reserve banks don't slash rates by 100 points, governments don't spend trillions rescuing banks and insurance companies - every day brings new wonders.  They were indeed certainties, but only because they had never happened before.

Economists call this the Black Swan effect, and a friend sent me a wonderful (if only partly comprehensible) article by Nassim Taleb.  The gist of it is this: just because something hasn't happened before doesn't mean it can't.  Its origins lie in the 19th century belief that all swans were white, because that was the historical evidence, without exception.  Until black swans were discovered in Australia.  Bang went that belief, with all its scientific "real life" evidence.

In our environment, the black swan effect suggests we should be cautious when people talk in absolutes like "always" and "never", even when they base it on statistics.  Taleb has a lovely example: "A turkey is fed for 1000 days - every day confirms to its statistical department that the human race cares about its welfare 'with increased statistical significance.'  On day 1001, the turkey has a surprise."

The other interesting thing is that despite these system-threatening events, life goes on.  The newspapers have stories other than the financial crisis, people continue to go about their lives pretty much as normal.

Here's the thing: we have the most extraordinary ability to adapt to changed circumstances.  Think about a time in the past when you were under enormous personal pressure, or even a time when you were travelling in a foreign country.  Did you simply stop functioning because it was so different, or did you simply narrow your focus and really concentrate on the next logical step? 

Times like these help us sharpen our focus on the fundamentals and really engage our mental resources in the here and now.  I read an article recently that said the best way to reduce road carnage is to take away all the safety infrastructure like median barriers, road markings, signs etc.  People would then have to concentrate solely on the task of driving, rather than cruising along on autopilot, trusting the engineers to have eliminated all risks.

In days like this, we have to re-think our business direction.  The world is going to be a different place, at least for a while.  All change creates opportunity.  The prize belongs to the people who can appreciate the downside and the greater risks but at the same time be looking for the opportunities created.  It might be as simple as realising that customers who were once prepared to pay a premium for prestige or service are now more interested in value for money.  How can you reconfigure and reposition to meet that need without  decimating your current margin by simply discounting your current offer?  What features (and associated costs) can you eliminate without sacrificing the essential value proposition?  Are there other markets or products that you should now look to?

The biggest thing is to let go of the way things were.  That was then, this is now, get on with it.

Mike Ashby

14 October 2008