Everybody nods.
In the years leading up to the collapse of the South Sea Company in 1720 there was an increased potential for foreign trade. Consumerism was on the rise. Wealth and luxury were no longer reserved exclusively for the aristocracy.
The company was promised a monopoly of all trade to the South American Spanish colonies.
Everyone agreed that the future was set fair. Everyone nodded.
But through a web of deceit, corruption, and bribery that included both company and government officials it was grossly oversold. The trading concessions barely materialized; the company had a very shaky commercial basis.
The company’s share price fell from a peak of £1050 at the end of June to £175 by September 1720, devastating institutions and individuals alike.
The bursting of the bubble, which coincided with the similar collapse of the Mississippi Scheme in France, ended – temporarily – the prevalent belief that prosperity could be achieved through unlimited expansion of credit.
In the later 1990s the new internet sector and related fields were the place to make your fortune. Everyone nodded.
A combination of rapidly increasing share prices, individual stock market speculation and widely available venture capital created an environment in which many of the internet based companies dismissed standard business models. They focused on increasing market share without regard to the bottom line. That would take care of itself.
These companies expected that they could build enough brand awareness to charge profitable rates for their services later. The motto "get big fast" reflected this strategy.
But the bottom line didn’t and the companies couldn’t. The dot-com model was inherently flawed.
Even if the plan was sound, there could only be, at most, one network-effects winner in each sector. Yet there were a vast number of companies all with the same business plan for the same respective sector. Therefore most companies with this business plan faced inevitable failure. In fact, many sectors could not support even one company powered entirely by network effects.
The dot-com bubble crash wiped out $5 trillion in market value of technology companies from March 2000 to October 2002. Add to this the write-downs by the venture capital community which, to name but three, include at least $280 million for kozmo.com, $160 million for boo.com and $65 million for MVP.com.
And so we come to recent times. The bankers announce they have found a way of lending the same money many times over and, even if it is lent where there is a high risk of default, it’s still safe. And everyone nodded.
However, these events and those like them down the years are merely the tip of the iceberg. These are just instances of high–profile, bizarre and reckless conduct. There is just as much perverse, incomprehensible and destructive business behaviour to be found in everyday dealings.
For example, a recent, cash-strapped client who offered 90-day credit to his customers because, “that’s what this industry does.” Everyone nods.
For example, a business acquaintance who cut back on his sales and marketing expenditure in anticipation of a fall in customer volumes (everyone nods) happily reporting that’s what actually happened.
For example, a company, anxious to have its employees engaged with the business (everyone nods), commissions a consultant to conduct a survey in order to discover what its people think.
For example, the business that is doing things in the same way as its competitors (everyone nods), yet expects a result that will show them as being exceptional.
The human animal is tribal. That is not the same as having a herd instinct. We can think independently if we chose; we are more likely to succeed if we do.
In 1841 Charles Mackay published his book "Extraordinary Popular Delusions and the Madness of Crowds", often cited as the best book ever written about market psychology.
In May 2004 James Surowiecki published The Wisdom of Crowds.
In the light of subsequent events, perhaps Mackay had it right after all.
In the years leading up to the collapse of the South Sea Company in 1720 there was an increased potential for foreign trade. Consumerism was on the rise. Wealth and luxury were no longer reserved exclusively for the aristocracy.
The company was promised a monopoly of all trade to the South American Spanish colonies.
Everyone agreed that the future was set fair. Everyone nodded.
But through a web of deceit, corruption, and bribery that included both company and government officials it was grossly oversold. The trading concessions barely materialized; the company had a very shaky commercial basis.
The company’s share price fell from a peak of £1050 at the end of June to £175 by September 1720, devastating institutions and individuals alike.
The bursting of the bubble, which coincided with the similar collapse of the Mississippi Scheme in France, ended – temporarily – the prevalent belief that prosperity could be achieved through unlimited expansion of credit.
In the later 1990s the new internet sector and related fields were the place to make your fortune. Everyone nodded.
A combination of rapidly increasing share prices, individual stock market speculation and widely available venture capital created an environment in which many of the internet based companies dismissed standard business models. They focused on increasing market share without regard to the bottom line. That would take care of itself.
These companies expected that they could build enough brand awareness to charge profitable rates for their services later. The motto "get big fast" reflected this strategy.
But the bottom line didn’t and the companies couldn’t. The dot-com model was inherently flawed.
Even if the plan was sound, there could only be, at most, one network-effects winner in each sector. Yet there were a vast number of companies all with the same business plan for the same respective sector. Therefore most companies with this business plan faced inevitable failure. In fact, many sectors could not support even one company powered entirely by network effects.
The dot-com bubble crash wiped out $5 trillion in market value of technology companies from March 2000 to October 2002. Add to this the write-downs by the venture capital community which, to name but three, include at least $280 million for kozmo.com, $160 million for boo.com and $65 million for MVP.com.
And so we come to recent times. The bankers announce they have found a way of lending the same money many times over and, even if it is lent where there is a high risk of default, it’s still safe. And everyone nodded.
However, these events and those like them down the years are merely the tip of the iceberg. These are just instances of high–profile, bizarre and reckless conduct. There is just as much perverse, incomprehensible and destructive business behaviour to be found in everyday dealings.
For example, a recent, cash-strapped client who offered 90-day credit to his customers because, “that’s what this industry does.” Everyone nods.
For example, a business acquaintance who cut back on his sales and marketing expenditure in anticipation of a fall in customer volumes (everyone nods) happily reporting that’s what actually happened.
For example, a company, anxious to have its employees engaged with the business (everyone nods), commissions a consultant to conduct a survey in order to discover what its people think.
For example, the business that is doing things in the same way as its competitors (everyone nods), yet expects a result that will show them as being exceptional.
The human animal is tribal. That is not the same as having a herd instinct. We can think independently if we chose; we are more likely to succeed if we do.
In 1841 Charles Mackay published his book "Extraordinary Popular Delusions and the Madness of Crowds", often cited as the best book ever written about market psychology.
In May 2004 James Surowiecki published The Wisdom of Crowds.
In the light of subsequent events, perhaps Mackay had it right after all.
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