What did the crisis teach you?
Varies for most of us. It has taught me that we need practical wisdom. I engage daily with the world of financial models, KPIs, rules, performance management, deals and board reporting materials. The crisis has taught me we don’t need more rules, we need deeper discussions about the merits of doing the right thing. Because smart people will always figure a way around more rules.
Is there anything that we’re still doing that we should stop?
In completely nerd language, we need to stop adding an IF statement on top of an IF statement to get a model to “balance”. What we need are elegant solutions. The thing with elegant solutions is that they require us to internalize many guiding principles which aren’t necessarily found in the world of economics. By economics I mean the study of resource allocation popularized during the mid 1700’s post industrial revolution. It would be naive to think that more rules will get the job done. Just to drive this point further. In the 1970’s, wild fire fighters in California used 4 guiding principles. This was changed to 48 well defined rules by mid 1990’s. End result was more deaths and poorer performance.
What did the crisis boil down to in your opinion?
In my view, it was a crisis of information asymmetry that was consciously propagated by a few members in the real estate finance value chain. Today the same asymmetry exists around valuation of tech companies. They quote big headline valuation numbers. Which gets used by retail investors to justify pricing when such companies go public. But rarely people talk about the terms of a subscription agreement in private deals. Whether it’s what’s app getting 19 billion or slack getting 1 billion in valuation, no one is talking about the actual terms and protections built in. This asymmetry might hurt some people.
So we’re on the verge of a second dot com bubble?
I’m not saying that, just saying that the crisis has taught us that we need to kill information asymmetry. We must do it because capital allocation should not be the privilege of the few. By engaging more minds in the process of making capital allocation decisions I think we can make better choices and hence access some practical wisdom.
So what needs to be done today?
In the end I think people get pissed off when they feel misled or taken for granted. All financial crises misled someone and someone got hurt. I don’t think we’ve learned how not to do that. We haven’t because we are still thinking rules and regulation. We need to give guiding principles a chance. We need to give practical wisdom a chance. I think more money going into the world of big data will solve that issue though. So overall I’m optimistic.