It’s happening again, and I guarantee it’s going to end as badly as ever.
No, I’m not talking about the upcoming season of American Idol. I’m talking about the fact that hard-charging executives in the financial world, just two years after the most catastrophic meltdown since the Great Depression, are back to the business of taking too many risks and asking too few questions.
Which raises the biggest question of them all: Why do so many smart people keep doing so many dumb things?
Consider, first, rampant excesses in a most unlikely part of the financial scene–the market for microcredits to the world’s poorest people. For years, those of us who study business innovation have been thrilled by the results and influence of Muhammad Yunus, Grameen Bank, and the idea that one powerful way to fight poverty is to make small loans to villagers (mainly women) who have tons of energy but no access to capital.
In recent years, though, latecomers to the concept of microcredit, from Wall Street and other financial hotspots, have expanded (and deformed) Yunus’s ideas beyond recognition, to the point where it has now become fashionable to denounce microlending as an abuse of the poor, and to rally borrowers to default on their loans. As a devastating report in The New York Times concluded, “Done right these loans have show promise in allowing some borrowers to build sustainable livelihoods. But it has also become clear that the rapid growth of microcredit … has made the loans much less effective.”
Meanwhile, in a very different part of the financial scene, financiers are also playing with fire. Roger McNamee, one of Silicon Valley’s most celebrated venture capitalists, is worried that Goldman Sachs’s much-ballyhooed investment in Facebook, which values the young firm at a staggering $50 billion, is going to lead to an explosion of private investments in hotshot companies–deals that look like public offerings but don’t involve nearly the same level of scrutiny. “If history is any guide, both sides will eventually overplay their hands on this, eventually leading to problems,” he told Andrew Ross Sorkin. “I hope the only people harmed are speculators.”
I hope so too, but I highly doubt it. The story of finance over the last 25 years has been the story of innovation run amok–and of our systematic failure, as a society, as companies, as individual leaders, to learn from mistakes we seem determined to keep making. It might be condo loans in Miami, credits to yak herders in Mongolia, or private stakes in hot Internet companies, but it’s déjà vu all over again: good ideas that go disastrously wrong, genuine steps forward that bring markets crashing down.
Leave it to Warren Buffet to offer a thoughtful perspective. In a memorable, hour-long PBS interview with Charlie Rose during the 2008 crisis, Buffet gave a master class in how the world got into its economic mess and what we can learn from it.
At one point, Rose asked the question that scholars, pundits, and plaintiffs attorneys will be debating for years: “Should wise people have known better?” Of course they should have, Buffet replied, but there’s a “natural progression” to how good new ideas go badly wrong. He called this progression the “three Is.” First come the innovators, who see opportunities that others don’t and champion new ideas that create genuine value. Then come the imitators, who copy what the innovators have done. Sometimes they improve on the original idea, often they tarnish it. Last come the idiots, whose avarice undermines the very innovations they are trying to exploit.
The problem, in other words, isn’t with innovation itself–it’s with the imitation and idiocy that follow. “People don’t get smarter about things as basic as greed,” Warren Buffett warned Charlie Rose. He’s right. But there’s no reason we can’t be reasonably intelligent about what we learn from the idiocy of the last few years and how we move beyond it.
That’s a central challenge for innovators everywhere. Sometimes, the most important form of leadership is resisting an innovation that takes hold in your field when that innovation, no matter how popular with your rivals, is at odds with your values and long-term point of view.
Can you distinguish between genuine creativity and mindless imitation? Are you prepared to walk away from ideas that promise to make money, even if they make no sense? Do you have the discipline to keep your head when so many around you are losing theirs?
Those questions are something to think about. They help smart people avoid doing dumb things.
Reprinted from Harvard Business Review