“When people stumble onto the truth they usually pick themselves up and hurry about their business.”—attributed to Winston Churchill
It’s the question everyone wants answered: Why did so many smart people miss the signs of the collapse of the subprime market? As early as 2001, there were many danger signals about the impending housing bubble and the rampant use of derivatives. Yet these signals were largely ignored by such financial players as Northern Rock, Countrywide, Bear Stearns, Lehman Brothers and Merrill Lynch until they all had to face the music harshly and abruptly. Some players were more prescient, however, and sensed as well as acted on the early warning signals. In 2003, investment guru Warren Buffett foresaw that complex derivatives would multiply and mutate until “some event makes their toxicity clear.” In 2002, he derided derivatives as financial weapons of mass destruction. Likewise, Edward Gramlich, a governor of the Federal Reserve, warned in 2001 about a new breed of lenders luring buyers with poor credit records into mortgages they could not afford.1
Some business leaders also noticed. Hedge-fund honcho John Paulson spotted “overvalued” credit markets in 2006 and made $15 billion in 2007 by shorting subprime. In July 2006, the chief U.S. economist at The Goldman Sachs Group Inc. warned that “nominal U.S. home prices may be headed for an outright decline in 2007. It would be the first decline in national home prices ever recorded, at least in nominal terms.” And in early 2007, his colleague further warned that “there are signals of a decrease in mortgage lending criteria and initial signals of financial troubles from subprime lenders.”2 Likewise, the board of the Dutch bank ABN AMRO Holding N.V. recognized the looming problems facing the banking sector, and sold itself. Shareholders did very well, collecting about $100 billion before it all fell apart, with Fortis SA/NV and others in the syndicate in ruin.3
The leading question
How can managers develop their peripheral vision to see what’s ahead more sharply?
Findings
- Managers who can identify and minimize both their personal and organizational biases are less likely to get blindsided.
- Catching and capturing distant threats and opportunities means applying different search methods—and looking for overlapping results.
- Teasing out the implications of any finding requires fitting it into different
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Director Schoemaker, thank you for this insightful and thought provoking article. Throughout years of employment experience, after being laid off, I learned to pay attention to warning signals, or “yellow flags.” For example, the project you’re on is getting less funding in the next year. Do you ignore it and put blinders on? Or start tuning up your resume? The correct answer is tune up the resume.
So, in a crude way, I developed this awareness and it helped me escape situations that were destined for failure. Certainly not foolproof, but the percentage over time is positive. So,your article resonates and is even stimulating in terms of research ideas, etc.
It would be an intereting hypothesis to test, but often I feel that groupthink doesn’t emerge out of the vapor, rather, there is a source, a leader, a tiny power group who starts the ball rolling. Of course, subordinates eager to please, “yes” their way through the day and one can see over time, if the organization is good, arrogance, blind faith and all the rest create the environment for groupthink. Even at the micro level, because I tend to be independent, I’ve seen others follow the low level leader for fear that they might draw their wrath with an honest disagreement and it’s not long before everyone is just nodding their heads. Some of the “enemies” (few) I’ve created by disagreeing with their infallibility is humorous. Point being, I’d like to see more about how “the leader” impacts “groupthink.”
Thank you for reading, Mark Ramos, engineer, MBA student, University of Phoenix