Kim Warren
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![[*]](./images/VSUK/default_icon.gif) posted on 4-29-2001 at 19:32 |
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Preventing the next boom and bust
A number of speakers at the Conference charged us with If were so smart,
we should be tackling the really big issues - I have some suggestions
in
the business field, heres the first.
The world seems to have shrugged its shoulders over the huge boom and bust
in
Dot-Coms and tech stocks during the last 4 years, but we saw ...
- the waste of vast sums of money
- the damage to the
livelihoods, contentment and both personal and
family stability of people roped into these firms
- the opportunity cost from
these precious resources not being
devoted to plausible businesses
- the further damage now being experienced from the
subsequent
economic downturn after it all went horribly wrong
This is a puzzle - we take a large fraction of the very brightest and
best
educated people in the world, put them through 2 years of further intensive
education in how business, finance and economics are
supposed to work, set
them to work in big consulting firms, VCs, and investment banks, pay them
highly and supervise them with very
experienced and equally bright managers.
Yet still we manage to invent quite implausible business ideas, project
unsustainable earnings
and market performance, and divert huge sums of money
and talented people from useful activity into a collective fantasy. Some
important
questions remain unanswered, like who they are, what they did, how
they got away with it, and why the rest of us meekly went along with them?
So the challenge to SDers in business is ... where is the next bubble coming
from, what will it look like, and how can we stop it?
Kim Warren
From: Kim Warren
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"Jack Ring"
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| posted on 7-30-2001 at 11:20 |
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Preventing the next boom and bust
Good review, Kim.
A major part of the dot bomb was a simple fact that not everything that
can be programmed needs to be.
Many companies were started without a Customer-Value Proposition, only
an Investor-Value Proposition. Sure, both entrepreneurs and
investors
had visions. It is just that they could not discern a vision from an
hallucination.
Then the other 90% was the Net
Future Value equation (what is a pair of
eyeballs worth over a future ten year window) coupled to a simple paper
profits Ponzi scheme.
The net effect was that the market valuation for dot.com went from 600
billion to 400 billion. Bummer.
A big drop? Not
if you view it in the longer term of five years ago
when it was less than 100 Billion and is now 400 billion.
There are several
"next bubbles" appearing.
KM is a big one. Same value-less hysteria fanned by the media.
The one after that will be the millions of
programmers who learned
another three letter word, XML, and delude themselves that they are on
the leading edge of building the semantic
web
The SD challenge is to learn how to identify the psychological factors
and model systems that behave according to the
heuristics of
systemantics.
Jack Ring
From: "Jack Ring"
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Martin Taylor
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| posted on 7-30-2001 at 13:36 |
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Preventing the next boom and bust
Kim Warren posed a problem:
>
>The world seems to have shrugged its shoulders over the huge boom and bust
>in Dot-Coms and tech
stocks during the last 4 years, but we saw ...
>...
>So the challenge to SDers in business is ... where is the next bubble coming
>from, what will it look like, and how can we stop it?
How can we stop it? There are indeed systemic and system dynamic
issues
here, and I dont think it matters how bright the individual
participants are. Most of them have the entirely appropriate
objective of
maximizing their personal or institutional profit. The
ways in which they can best achieve that objective as things now
stand lead to
oscillatory behaviour of the economic system as a
whole. It was not a fantasy that investing in dot-coms could provide
rapid
accumulations of wealth. For many people it did just that.
The system-dynamical issue is that when decisions can have strong
effects in a loop whose loop delay is long compared to the bandwidth
of the decision mechanism, oscillation is hard to avoid. So, one way
to approach the problem as a whole might be to make it unprofitable
to make rapid changes of investment decisions. In plain language, we
could tax capital gains on an exponentially sliding scale, with a
time constant of at least a year, starting at 100% tax on any capital
gain made from stock held less than, say, 3 weeks. The same logic
also applies to buying and then reselling where no value is added in
the process--real-estate flips, for example.
It applies also to foreign exchange transactions, in which rapid
fluctuations
can be devastation to a national economy. For foreign
exchange, however, effective damping could be built in simply by
applying a flat
tax of half or one percent (the Tobin tax) to all
transactions. Such a tax should greatly stabilize the rapid
fluctuations of the
foreign exchange market, without impeding the
ability of manufacturers to acquire and use foreign money. If the
Tobin tax had been in
place, we probably would not have seen the SE
Asian meltdown of a few years ago.
The point here is not to raise more tax money,
but to change the
system dynamics so that the motive of maximizing profit leads to
slowly changing decisions based on predicted
conditions months or
years in the future, rather than on those of the next hours or days.
A side effect would be to make the quarterly
reports to stockholders
much less influential to a companys stock value than they are now,
as compared to the perceived value of
managements long term
planning. And that should lead to healthier, stronger companies run
by managers who could dare to think and act
for the long-term benefit
of the company rather than for the best results in the current
quarter. In the long run, that should mean more
profits for all
concerned.
Martin Taylor
From: Martin Taylor
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Kim Warren
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| posted on 4-2-2001 at 15:32 |
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preventing the next boom and bust
Ive had a couple of interesting responses from insiders in the recent
tech-bubble, who seem to share the sense of frustration. Heres one -
who
prefers to remain anonymous ...
It seems to me that a logical first step would be to evaluate the business
plans (and associated
spreadsheet models) used by several failed dot coms to
determine whether flawed assumptions and policies (discoverable using SD
reasoning)
were present. If so, then you could draw the conclusion that
employing SD methods might have prevented a lot of waste. If not, then SD
methods would presumably have led to the same unfortunate outcomes.
As you know, most business plans are justified using spreadsheet
models. If
it can be demonstrated that inherent limitations with spreadsheet models
render them unable to reflect realistic business
operations, then the need
for SD (or something else) would be apparent. However, at this point, the
predominant feeling seems to be that
the spreadsheet models are adequate
(or, in any event, as good as can be achieved) and there is therefore no
motivation to learn a more
complex, less well-documented alternative.
Money is invested based on perceived management team talent, industry
trends, and the
business plan. In the dot com case, "e-business" was
correctly perceived to be a rapidly growing industry. Many management teams
comprising outstanding groups of people were formed. That accounts for two
of the three prerequisites, leaving the business plan as the area
where SD
might be shown to be a superior tool--sufficiently so to warrant the higher
development cost. The audience for this message
would be the investment
bankers, who have many choices about where to invest. Perhaps a two-step
method would work. Step 1: screen
candidate investments based on the
simpler, less expensive spreadsheet models (almost always within the
capability of the management team
to develop). Step 2: require preliminary
winners to prepare SD models to validate the spreadsheet assumptions.
-------------
It
looks like what we need to tackle the original question, then, is some
group who have a strong interest in anticipating and preventing a repeat
of
this episode - strong enough to support some research. Any ideas who this
might be, anyone?
Kim
From: Kim Warren
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"Thompson, Jim B261"
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| posted on 8-3-2001 at 10:23 |
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preventing the next boom and bust
Silly assumptions in spreadsheets lead to silly forecasts. Silly
assumptions in system dynamics models produce silly results, too. When a
bunch of people act foolishly, its not a methodology driving the
foolishness. It might help to find out what causes sober people to act
like fools, but knowing the cause may not prevent the Next Big Scam; it may
trigger it.
Jim Thompson
CIGNA HealthCare
B261
900 Cottage Grove Road
Hartford, CT 06152
jim.thompson@cigna.com
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Paul Martin
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| posted on 4-4-2001 at 09:57 |
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preventing the next boom and bust
There is an assumption in all of this that somehow experiment and failure is
abnormal. The gold rush, the advent of the motor car, and a host of
scientific
endeavours, as well as the lessons of nature, all show that this is a normal
method of progress. Whilst not wishing to
discourage the thought experiment,
perhaps we ought to place boundaries around it, that all we may be able to do
is to facilitate the
identification of the extreme outriders (which in fact is
not that hard to do - most professional investors did not get seriously burnt
through their seeking to stake out a claim in the newly opened territory, and
most new that this was by way of informed gambling rather than
mainstream
investment).
begin:vcard
n:Martin;Paul
tel;cell:0416015161
x-mozilla-html:FALSE
url:www.profitfoundation.com.au
org:The Profit Foundation
adr:;;;;;;
version:2.1
email;internet:paul_m@profitfoundation.com.au
note:Strategic advising for growth and sustainability
x-mozilla-cpt:;1
fn:Paul
Martin
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John Sterman
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| posted on 8-4-2001 at 13:32 |
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preventing the next boom and bust
Experiment and failure are indeed a normal and desirable part of the
innovation and learning process, for individuals and for society, as
Paul Martin nicely put it.
The more troubling issue is that a great deal of the excesses and
losses weve seen in this latest
tech bubble, and in many prior
bubbles, are not the result of "informed gambling" but ill-informed
herd behavior. There is nothing
desirable, nor, Id like to think,
inevitable, about firms that extrapolate demand for fiber optic
capacity at 30%/year from here to
eternity (encouraged by the best
consultants their money could buy), then build capacity to meet it,
leaving us with fiber utilization
today <10%, and destroying the
value of the firms that make it and bought it. There is nothing
informed, desirable, or essential for
the progress of society when
investors grab up the stocks of firms with no earnings, no business
model, no sources of competitive
advantage or increasing returns, and
do so at valuations that made bulbs during the height of the tulip
mania look like bargains. In
many cases the temporary success of
these startups reflect in desperate attempts by investors to avoid
being left out of the boom or in
their misguided belief that they
could always find a fool greater than themselves.
The internet/tech bubble is simply the latest
in a long line of
similar bubbles going back centuries. The essential feedback
processes underlying the dynamics of these bubbles have
been well
characterized at least since J. S, Mill distilled their essence in
his 1848 book Principles of Political Economy (the relevant
paragraph
is reproduced on p. 173 of Business Dynamics). The core process is
the positive feedback through which price increases
generate
expectations of future rise, increasing demand and prices still more
as investors buy in the anticipation of capital gains.
The bubble
inevitably bursts when supply eventually catches up to demand. Due
to the delays in supply response the result is overshoot
and excess
capacity, with attendant financial distress (see also Charlie
Kindlebergers classic book Manias Panics and Crashes, which
remains
the best economic history of these phenomena.
Further, it is not correct that "most professional investors did not
get seriously burnt" in the collapse of the tech/internet bubble.
Research shows professionals are no better at avoiding the cognitive
and emotional traps that lead to judgmental errors as lay people.
These include hindsight bias, wishful thinking, and overconfidence,
among many others. Indeed, in many cases expert judgment is just as
bad as that of novices, but the experts are significantly more
confident in their skills (overconfidence bias). Yales Bob Shiller
has done perhaps the most relevant studies of these problems in the
financial markets. See his 1989 book Market Volatility (MIT Press)
for early work, and his new Cowles Foundation working paper "Bubbles,
Human Judgment, and Expert Opinion" for a clear argument about the
current collapse of the bubble (download at
http://cowles.econ.yale.edu/P/cd/d13a/d1303.pdf). Bobs argument is
essentially the same as JS Mills--in particular, he highlights the
importance of the positive feedback of rising price expectations ->
speculative demand -> price increases -> still higher price
expectations, but grounds his theory in the extensive and growing
body of cognitive and social psychological research documenting how
human judgment works in these settings. Bobs more popular book
"Irrational Exuberance" (Princeton UP, 2000) is also highly
recommended.
Like those of us who have modeled human behavior in firms,
organizations, and markets using system dynamics, Bobs
argument is
not that people are "fools" or "stupid" (though surely there is
foolishness and stupidity in the world), but that there are
deeply
embedded, pervasive, and important bounds to human rationality that
constrain our ability to make wise decisions. These bounds
are
perceptual, cognitive, and emotional, and affect experts about as
much as novices.
As just one example, Bob surveyed
individual and institutional
investors after the stock market crash of Monday, 19 October 1987,
when the Dow Jones Industrial Average
fell 508 points (23%), an
all-time record. He asked, "Did you have a sense just before the
crash (around October 12, 1987) that the
market was overpriced
relative to fundamental value (Try hard to remember what you thought
then.)" Fully 72% of individual investors
and 84% of institutional
investors said yes. However, 90% of the individual and 72% of the
institutional investors reported either no
change or an increase in
their holdings between October 12 and 19. When asked "Did you think
at any point on October 19, 1987 that you
had a pretty good idea when
a rebound was to occur?" nearly 30% of individual investors said yes,
ten times more than the number that
actually bought that day.
Twenty-eight percent of institutional investors also claimed to have
a good idea about the timing of a market
rebound, also substantially
more than those who reported having bought the day of the crash.
After the fact, investors, including
professionals, claimed to know
the market was overpriced before the crash, yet at the time very few
used this supposed knowledge to
liquidate their positions.
Similar data characterize the most recent bubble and market collapse.
If people understood the
most basic dynamics of economic and business
systems a great many of the unnecessary and wasteful investments
during the bubble, if not
the bubble itself, might have been avoided.
I suspect that innovation and social progress would not have been
slowed, and might instead
been enhanced, since the resources that
went down the rat hole of ignorance and greed could have been
deployed more effectively. The
inability of market participants to
learn from the centuries-long history of bubbles and crashes suggests
how deeply embedded are the
mental models that create these phenomena
and how difficult-and important- is the task of overcoming them.
John Sterman
From: John Sterman
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"George Backus"
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| posted on 8-6-2001 at 12:03 |
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preventing the next boom and bust
I think John brings up a good point that the issues of the ".com" are
hundred (or thousand) year old issues having to do with basic human
limitations -- issues for which system dynamics is well qualified to address
but where human nature may long continue to have the power to
resist simple
and obvious solutions. The SD "beer game" hand-simulation lives eternal.
One area that may be relevant, however, is
globalization. For those that
study history, we have been here before. The opening of the 20th century
provided an epic of globalization
the still exceeds the current conditions.
Steam reduced transportation and product costs. Colonialism provided new
resources and (more so)
new markets. Some countries did not experience the
economic successes, but the reduced costs, emigration, and hope of a
turnaround
allowed conditions to continue until the then new technologies
began to reach asymptotic improvement limits and nation-states needed to
face up to reality (market saturation, the reallocation of maker shares,
power, wealth, and resources). As the countries acted to avoid
facing hard
issues, they became protectionistic and nationalistic. World War 1 was the
result.
For those who skeptically hear
the current voices of globalization (both it
adherents and opposition), the data does indicates that economic theory is
not as bad as the
opposition and some SDers would like to believe. The
Free-trade zones (FTZ) do have higher wages than the protected areas. The
importance
of the new industry eventually give workers some leverage and
both governments and companies end up compromising on a host of issues. The
dynamic is a variant of the industrial revolution played out again and
again. The path is not smooth, inequities appear, struggles ensue,
hardship
need to be overcome, and humans can easily make the worse of it. There is a
initial "race to the bottom" as all parties jockey
to lower casts, maximize
advantages, and lock in market shares. Strong historical and current
evidence exists to say the benefits are
ultimately there. Stronger
historical and current evidence indicates that the small group of powerful
stakeholders who stand to loss
will do whatever is necessary to protect
their interest. They will fail to maintain their positions, but do great
damage to anybody
within range. This story seems to be repeated on every
page of every world history book. There appears to be no hint that this
storyline
will change anytime soon.
We are in a time of great technological changes. Added to that are the
climate change issues. A reality
check says that achieving greenhouse gas
reduction will not be as economically easy or socially friendly as the
clairvoyant optimization
models used for the policy work would lead us to
believe. As Europe moves forward, it will have production costs that
exceed those of
the non-complying US. Eventually Europe will demand some
protectionist rulings against the US. Pressure will then be on the US join
the
fold on GHG compliance. Many US-based multinational corporations will
add their weight to push for US compliance. However, other US companies
will
note their growing market share in the developing countries (who shun the
higher-cost goods from complying countries). Europe then
has to
additionally fix the "leakage" from the rest of the world. It is unclear how
the "transient" ends. Does it produce new
isolationism and the
international terrorism that brings due to the permanent economic
dislocation produced in the process? Or do humans
just revert to old
paranoid and problem-avoidance responses with major wars being the final
bubble relieving "solution?"
Lots of nuclear material has left Russia. Biological weapons are cheap and
easy. Desperate people (rulers of nations states) can do
desperate things.
It is very difficult for a new answer to move society once it has
positioned itself to accept another answer.
The "first answer" is the one by
which all others are compared. In the US energy arena, I think I can
truthfully say that SD was
successful. It key success hinged (to my mind) on
having the answer first. The existing models of the time had misunderstood
technology
and international market (OPEC) feedback effects. A SD model that
ran in seconds could easily out-maneuver the old US government model that
took hundreds of hours to solve for an optimal condition that did not look
much like the existing oil crisis. For over a decade the SD
approach
(FOSSIL2) ruled the roost by quickly out-distancing the "establishment"
(like a disruptive technology in the marketplace).
I think that a well publicized (and very defendable) SD look at
globalization dynamics could have great value to society and to a
wider
appreciation of SD. "Limits to Growth" has taken many a hard knock but it
did have a positive impact of government positions and
societal responses.
It caused beneficial changes. It was an imperfect model, but it was useful.
(No model can ever be perfect!). I, for
one, would again like to see SD
doing something useful in a highly visible way. If we think that this
venture is too risky or that we may
embarrass ourselves, then maybe we
better rethink the legitimacy of our paradigm.
George
George Backus
Policy
Assessment Corporation
14604 West 62nd Place
Arvada, CO 80004-3621
Bus: 303-467-3566
Email: George_Backus@ENERGY2020.com
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"Carmine Bianchi"
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| posted on 4-8-2001 at 15:10 |
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preventing the next boom and bust
Dear Collegues,
I found that there are many affinities between the issues pointed out by Kim and the work weve been doing at CUSA-System
Dynamics Group in the last years.
Two issues are particularly interesting to me:
1. providing a research base justifying the limits
of the spreadsheet/accounting-related approach in drawing up business plans. This involves a comparative analysis between the current practice in
different countries. We plan to publish some results of this fieldwork (involving comparisons between the UK, Spanish, Portuguese, Canadian and
Italian practice) in the forthcoming Special Issue of the SD Review on small-medium enterprises. If anyone is interested in contributing to this
fieldwork, Ill be very pleased to broaden the geographical scope of it;
2. building SD learning environments embodying both the SD and
the financial/accounting perspective, to get dynamic business plans. On this issue, in the last five years weve been developing a number of projects
involving applied research with small-medium enterprises from different industries, such as: winery, engineering, distribution.
Some of
the results of our field work on both the above issues are summarised in our web-site and have been recently presented at the ISDC in Atlanta in the
workshop on: Implementing Management Control Systems in SMEs to enhance entrepreneurial learning
A copy of the materials presented at
the workshop is available from our web site at:
http://www.unipa.it/~bianchi/eng/workshop/workshopISDC01.htm
I look forward
to starting with all those of you who are interested in the above issues a mutually profitable long-term co-operation.
All the very
best,
Carmine
_______________________________________________________________________
Carmine Bianchi, Associate
Professor of Business Management
Universities of Foggia and Palermo (ITALY) - Faculty of Economics
Scientific co-ordinator of CUSA-System
Dynamics Group
e-mail: bianchi@unipa.it;
web page: http://www.unipa.it/~bianchi
- Phone (office) : +39.091.6254313 - Fax
(office): +39.091.6254532
- Mobile phone : +39.338.9244463 - Phone (home): +39.091.304811
Mail Address:
c/o C.U.S.A. -
SYSTEM DYNAMICS GROUP - P.zza A. Gentili, 12 -
90100 PALERMO (ITALY)
CUSA-Sdg Small Business Discussion List web address:
http://www.jiscmail.ac.uk/lists/sme-learning-planning-growth.html
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Martin Taylor
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| posted on 8-10-2001 at 13:36 |
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preventing the next boom and bust
John Sterman wrote, among much else...
> There is nothing informed, desirable, or essential for the
>progress of society when
investors grab up the stocks of firms with
>no earnings, no business model, no sources of competitive advantage
>or increasing returns,
and do so at valuations that made bulbs
>during the height of the tulip mania look like bargains. In many
>cases the temporary success
of these startups reflect in desperate
>attempts by investors to avoid being left out of the boom or in
>their misguided belief that
they could always find a fool greater
>than themselves.
Much of the following analysis seems based on the unstated assumption
that stock prices are (or should be) based on the prospects of the
company whose stock is being bought and sold. Perhaps they _should
be_...and I think my earlier contribution to this thread suggested
how they _could be_.
But stock prices, in the current legal
and institutional
circumstances, are controlled by a feedback loop in which the actual
and expected near-future price is the dominant
variable. The everyday
viability of the company is at best a minor modulating influence on
those perceptions. One expects that a well
run company will have a
higher future stock price, not because it is well run, but because if
other investors perceive it to be well
run, they will want to buy its
stock more than they (on average) want to sell it.
When stock prices run up sharply, whether it be
for a company, a
sector, or the market as a whole, most investors will expect the
price to fall _some time_, and as the price rises will
be looking
ever more nervously for signs that the fall is starting. But while
the price seems to be still rising, the _prudent_ investor
will hold
off selling. The fall happens when enough people think that the fall
has started that their numbers dominate those who think
it has not
yet come. Then the positive feedback kicks in in the opposite
direction, though the critical perceptual variable (what other
investors are perceived to be going to do) has not changed. More
people want to sell before their investment loses too much value, and
as the price drop continues, the still-hopefuls (who are biased to
expect other investors to keep buying) also turn into
save-what-we-can sellers. None of this has any relation to the real
value of the company in question--though a sufficient price drop may
make it hard for the company to get new financing if it needs it.
One approach to solving this problem, as I suggested earlier, is to
take the profit away from the quick changes of decision--a buy
followed by a quick resale, for example. If investors know that
riding the wave upward would be unprofitable unless they hold on for
a significant period, no matter how high the wave goes, then they
should be more inclined to weight the value of the company in
contrast to the day by day behaviour of the companys stock.
The
dynamical problem is that the existing trading regime is roughly
equivalent to what in electrical circuitry is called a "one-shot
multivibrator." the voltage builds slowly, and then collapses fast
before beginning to rebuild. The atomic-level processes are quite
different, but their effects are similar.
It really seems to have nothing to do with irrational behaviour or
the kind of
non-optimum market processes or cognitive processes
mentioned in Shillers essay, though those processes doubtless
underly the detailed
structure of the bubble growth and explosive
decay. Purely rational behaviour on the part of the investors, with
full information (other
than the instantaneous plans of other
investors) would seem likely to lead to exactly the same bubble and
bust behaviour of the
market.
Martin Taylor
From: Martin Taylor
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Moxnes Erling
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| posted on 4-13-2001 at 09:56 |
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preventing the next boom and bust
If I read Martin Taylor correctly, his argument is that boom and bust is
caused by basically rational market behavior and not by misperception:
"But
while the price seems to be still rising, the _prudent_ investor will hold
off selling." This may sound rational at first sight, and
I am sure it is
intendedly rational. However, a simplified model that only consideres price
expectations does not capture the full
complexity of the market.
Vernon Smith finds in his laboratory experiments of boom and bust that
people do behave according to
their "homegrown expectations" - probably
based on extrapolations. However, he also finds that as the price stagnates
and starts to
decline, the market becomes very thin, there are no longer
buyers, while the price can stay high for some time.
Thus a rational
model should foresee this, namely that it is only a very few
stock holders that are lucky or clever enough to find buyers at the high
price. Hence as the price rises, the rational investor should not only look
at the gain from the expected price rise, she should also
multiply the gain
by the probability that she is able to sell at the high price. Since this
probability drops quickly as the price
approaches the peak, it becomes
profitable to sell earlier. And if a sufficient number of investors realize
this, the driving force behind
the boom will be weakened and the boom may
not happen at all.
For this reason it seems correct to claim that boom and bust behavior
is
driven by misperception of feedback, i.e. missing feedback through the
thickness of the market. This does not mean that nobody profits
from boom
and bust; an anecdote about a very successful Norwegian investor (Stenersen)
says that his strategy was always to sell "too
early". However, the majority
is likely to loose because of the more clever ones and because of the
misallocation of money that is likely
to follow a boom.
Erling Moxnes
From: Moxnes Erling
Erling Moxnes
SNF,
Breiviksveien 40, N-5045 Bergen, Norway
Tel. +47 55959526, Fax. +47 55959439
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Tom Fiddaman
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| posted on 8-12-2001 at 20:29 |
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preventing the next boom and bust
Martin Taylors characterization of the reinforcing process driving
speculation is accurate. However, I think you will find few economists who
would agree that "Purely rational behaviour on the part of the investors,
with full information (other than the instantaneous plans of
other
investors) would seem likely to lead to exactly the same bubble and bust
behaviour of the market." The counter-argument is as
follows: as soon as
prices depart from fundamentals, rational speculators would recognize the
increasing likelihood of a correction, and
adjust their positions
accordingly. If everyone were rational and well informed, the boom-and-bust
would be arbitraged away because
theres no opportunity to profit from it
without a pool of suckers to outwit.
Even if economists are wrong (wouldnt be the first
time) and the source of
boom and bust behavior really is some kind of informed speculation, one
would then expect that as prices diverge
farther and farther from realistic
fundamental values, analysts, fund managers, et al. would be saying things
like "prices are way above
fundamental, but we think it makes sense to ride
the wave a little further before it collapses." Instead, we hear about IT
investments
putting productivity growth on a new trajectory so that we can
have sustained inflation- and unemployment-free growth at unprecedented
levels. Analysts flog their favorite telecom stocks (i.e. the ones other
parts of their company are underwriting) in denial of mounting
debt.
The suggestion of adding friction to markets is an interesting one,
particularly because it conflicts so starkly with the
normal economic
mantra of removing friction to improve performance. The pure friction of a
flat transaction tax might be more attractive
than stepped capital gains
taxes, which create tax incentives for holding assets when there is no
fundamental reason to do so, creating
a delay which could worsen
oscillation. Id love to watch congress try to agree whether the current
system is over- or underdamped.
The fact that expectations about fundamentals get inflated to justify
speculative excesses suggests to me that theres a lot more
involved - and
at stake - than stock prices. Inflated expectations in equity markets are
only the most visible symptom of boom-and-bust;
production plans, inventory
levels, etc. are also caught up in the same dynamics. Making the
speculative excesses of the market go away,
or declaring them optimal, may
do little to mitigate the total damage of the bust unless the fundamentals
are also fixed.
Boom and bust has been with us a long time, and society for the most part
muddles through. However, we should keep in mind that a bigger
speculative
experiment - the drawdown of natural resources - is well underway. Perhaps
thats the bust we should be worrying about.
Regards,
Tom
****************************************************
Thomas Fiddaman, Ph.D.
Ventana
Systems http://www.vensim.com
8105 SE Nelson Road Tel (253) 851-0124
Olalla, WA 98359 Fax
(253) 851-0125
Tom@Vensim.com http://home.earthlink.net/~tomfid
****************************************************
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"Jack Ring"
Posts:
Registered: 1-1-1970
Member Is Offline
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| posted on 9-2-2001 at 04:12 |
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preventing the next boom and bust
I suggest asking one of the founders of the Venture Capital "industry"
such as John Doerr.
In my experience, having deflected
several startups from becoming hubs
and brokers, the issue is not spreadsheets vs. SD but is vision vs.
hallucination. That is, most all
had spreadsheets but the spreadsheet
showed only the company view and did not show the expected economic
benefit to be experienced by a
customer. In short, no value propostion.
I do think that SD would have helped them avoid this blindness by
encouraging a deeper
view of what the product was expected to do to or
for a customer and what share of the resulting value a customer was
likely to be willing
to send to the supplier. Spreadsheets do not
necessarily encourage "flow" thinking.
Jack Ring
From: "Jack Ring"
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