To get to the personal application of the lesson, the good stuff, we must first remember what we've learned about how bubbles grow. A run-up in housing prices fueled by demand in the early 2000’s culminated in the peak property valuations of 2006. A result of widespread delusions that recent history is an infallible forecast of the future. Economic bubbles begin with an increase in demand (on a graph we would expect to see a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase.
In the case of the housing bubble the delusion was systemic: regulations and programs permitted lowering the bar with products (sold as social programs) like zero percent down payment mortgages initiated by aggressive speculators who entered the market with ambitious goals. Some of these may have had noble social intentions, but more often than not their actions were far from altruistic. Their objective, clearly, was to extract maximum value through short-term buying and selling. This further drove supply. At some point, demand decreases, or levels off at the same time supply increases, resulting in a sharp drop in prices - and alas the bubble bursts, and the ones who are deemed too big to fail are bailed out with taxpayers money and all the rest fall down! Sound familiar?
In addition to the Housing Bubble we have the Baby Boomer Bubble, the Social Security Bubble, and indeed many trendy products sold on the market today go through their own bubble cycle; we define a bubble as “a structurally tenuous entity with nothing of substance at its core”. If you' happen to have been in deep meditation living in the Himalayas for past decade or so, you can now count yourself as one who is up to speed on the socioeconomic impact of bubbles.
So what is a wide eyed child infatuated with bubbles to do? One of the basic laws of nature is that sustainability requires balance. No worries this is not metaphysics, there is plenty of empirical evidence of these patterns. If we want to make something work over the long haul we must have structure that allows us to adjust or "moderate" what we put into the system. In business we call that a "control". We approach the subject of control scientifically.
Moderation is only possible when we have developed an accurate feedback loop. This is true in relation to product sourcing, project costing, optimization in operations, financial controls and it holds true for capital investing as well. We talk about hedging risk, putting our eggs in different baskets. In fact the principle of balance holds water in all matters of control.
Feedback is only as effective as the reception of the manager. So you start with an open door policy. Feedback is only effective when two things occur. First we must be willing to ask of ourselves “why” does this matter to me? and secondly we must invite and then allow others to pose the tough questions. My dad use to say "take the cotton out of your ears and put it in your mouth".
One of the key questions which serve to prevent a bubble from over inflating is to consider introspectively whether we always need more of everything. A bubble is very powerful force having the potential to blow your head clean off. The question is do you want to take the chance? Well ask yourself; do yeh?
The primary threat which comes with being an entrepreneur or a leader, is this: as much as we might like to think that we are just one of the crowd, in reality we exercise power and control everyday and in the capacity of that authority and in a sense, everyone sort of lives in a self-imposed bubble. We often refer to them affectionately as boundaries. Boundaries are good, bubbles are bad. The danger is that if we are not careful our own bubble can expand with a large volume of snoopy gas and cause us to lose touch of what is sustainable.
There is hope, we can learn to recognize the symptoms of an over inflated bubble. The first telltale sign is that we take too much. We capture too much value for ourselves, leaving not quite enough for the other parties whom we depend on and who depend in us. This isn't just about money, it is about resources, others precious time and space. After a while something has to give, the trust between parties is broken. High turnover rate, unhappy customers looking for alternatives, losses in lifetime value, a damaged reputation and/or legacy can occur.
Call me naïve but I really think that this often happens to us quite unintentionally. We just miss the writing on the wall, maybe even get a bit too ambitious. That doesn't mean that we shouldn't think and act big. The thing is to make sure that our center of gravity is squarely under the load before attempt to pick it up.
Another of my Dad's sayings was: "The hurrier I go the behinder I get" attributed to Joe Swift (for the longest time as a kid I thought I was Joe) This problem is compounded by the bobbing heads of the people we tend to encircle ourselves. The yes men.
There is ample evidence of what a bubble can do to a economy in recent economic history. But the bubble also impacts the American family and our way of life. What we need to be aware of is that bubbles erode the foundation of our companies and more importantly they damage trust in our relationships with others some of whom really matter to us. So the one bubble that we need to understand more than any other is the one that each individual is presently living in.
Yes, everyone has his or her own little (or not so small) bubble. There is no way really not to live in a bubble. Freud, the father of Psychology referred to our bubbles as our “ego”. The values that we form in relation to others he called our superego. It is our circumspection, or the win/win principle. As leaders we create expectations for ourselves and others. We create our company culture and we define our missions.
All of this is to some extent a result of our worldviews, but it also helps to reconfigure our perspectives as we move through life. Bubbles are not curable. But they can be treated. If we invite honesty from our workers and business partners we will continue to foster a healthy superego and keep our egos in check. There is a third part in Sigmund Freud’s model called the Id, which attempts to explain our base creature instincts. The Id is a topic for another time except to say that it is the least understood aspect of human behavior and the one that if it is unbalanced leads to institutions, mandatory medication and physical constraints.
No worries for most of us socialized folks whom accept that we must follow the rules, that is we keep things lawful. But ethical or moral behavior often presents a dilemma for the ego. In case you haven't been paying attention in the past decade capital markets have their own unique set of rules and quirks. Bankers employ excellent lawyers and the very best lobbies; there are presently no criminal penalties under federal law for the gross negligence of being complicit in creating an economic bubble! In a similar sense there are no concrete penalties for being a delusional jerk as an entrepreneur; indeed people might even seem to get away with bratty behavior, at least for a time. With all of the fancy psychology models the least common denominator to keeping our bubbles flying under the radar is simply "listening" and responding to the needs of others as well as our own.
An over inflated Bubble can be fatal to relationships. The risk is that one day we just might wake up to find we had made some seriously wrong investments in life. We might find that we have a concrete palace and storehouses full of gold and no one to share any of it with, because that bubble had become so large and our egos distanced us so much from everyone that matters that nothing matters anymore. I think of Biblical story of the Prodigal Son. It are the people in our lives that matter most. We should consciously maintain boundaries while watching to to be sure they don't become bubbles. Because If we allow our bubbles to carry us away, it really won't matter where we land because we'll be all alone. The valuations of our equites won't be worth the paper they are written on if we allow that to happen.
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