Blowing Bubbles
I loved playing with bubbles as a child. We often made our own bubble solution from dish detergent and water, but the best was when Vera, my grandmother, bought us bubble solution from the store. I didn’t know it then, but the store-bought solution contained propylene glycol which acts as a surfactant to keep the bubbles from collapsing on themselves and keeps them from drying out quickly.
Bubbles are interesting because there are physical limitations to their size related to the composition of the solution and the environment around them. The more solution contained in a bubble, the bigger it can be. However, too much solution creates too much weight and will pull the bubble apart.
From the minute the bubble is formed, it is dying. The moisture that makes the bubble possible is being pulled into the surrounding air. The hotter and dryer it is, the faster the process happens. It didn’t take us long as kids to figure out that overcast, cool, humid days were excellent giant bubble days!
I think it is appropriate that we use the term bubble in economics. Bubbles, in an economic context, generally refer to situations where the price for something—an individual stock, a financial asset, or even an entire sector, market, or asset class—exceeds its fundamental value by a large margin.
Economic bubbles are created by a common pattern of behavior. We can define the bubble with five stages, each of which is driven by a relatively normal behavior or common bias. While economic bubbles play out in the headlines and markets of the world, there are many small bubbles (often not economic) that play out within our own lives and organizations.
The first stage of a bubble is “displacement.” A displacement is any event or set of conditions that leads to us being attracted to a new paradigm. In economics, this could be low interest rates, a new technology, or fear. In broader terms, this can be any new information or condition that causes us to think differently about things.
Displacement isn’t bad; in fact, it is necessary for any growth, innovation, or development. We need displacement to open doors to new opportunities and different paths. We must be careful to recognize that we all have a novelty bias which is a tendency to judge new things with different criteria.
The problems begin when displacement leads to a “boom.” In this stage, the “investment” in the new begins to grow exponentially. As interest picks up it fuels more interest. Fear of missing out (on what could be a once-in-a-lifetime opportunity) draws more and more people in. This further inflates the value of the asset or idea which creates even more interest, and the cycle begins feeding itself.
The “euphoria” stage is when things get dangerous. Caution is thrown to the wind and new metrics are created to justify the relentless rise in value. In economics, this is fueled by the “greater fool” theory which states that you can buy overpriced assets and sell them to an even greater fool who will pay more. Fundamentally, people start believing in a future state that breaks too many rules learned from the past.
Finally, there is the “profit taking” and the “panic”. I take these together because once the euphoria occurs, these two are inevitable. Someone is first to realize this won’t last, and they get off the train. A few people notice, and they quietly slip off the train too. Pretty soon, it becomes more evident that the train is headed for a bridge that is out and people start jumping off (battered and injured, but alive) until only a few people remain to ride the train to the bottom of the gorge.
As leaders, we are often required to determine if a displacement is minor, requiring a measured and slow response, or seismic, requiring an all or nothing approach. History is our friend here as cycles are evident throughout our past and can give us real clues as to the likely outcomes of a shift.
More importantly, the role of the leader is to stay outside the emotional and mental fray that catches people up and carries them off. Sometimes, it is enough to remind ourselves of the mission and strategy we are committed to. Other times, we must be discerning and make choices (which means taking risks) without enough information.
Healthy communities and their leaders remain aware of the tendency toward bubbles. Bubbles are fun and exciting and promise lots of reward for little effort or risk. Bubbles are fleeting, though. Some, like the ones we made at home, break quickly in the heat and wind of a summer day. Others, like the store-bought ones, last longer. But they all break.
Great leaders understand this cycle and avoid getting caught up in it. They lead confidently toward a future full of displacement and change but employ reason and rationality to balance the risk. More importantly, they help their team see bubbles as what they are—attractive and mesmerizing, but always momentary baubles. Leading well through the bubbles, big or small, is the Bison Way.