Disruptive Change Caused by Credit Crisis akin to War

Two Speed World, by Gerald Ashley and Terry Lloyd

My friends and ex-Dow Jones colleagues have written a fantastic book about change, how fast it happens (or doesn’t) and its impact on the world.

We live in a bewildering world of change, which splits naturally into steady progress punctuated by sudden disruptions – the two speed world. Disruptive change occurs at high speed, according to the new book Two Speed World, while incremental change happens more slowly.

Two years ago, a world that was mainlining credit like cocaine was stunned when its habit was abruptly curtailed. A few economists and bankers had been predicting that the credit binge could not last, that it was dangerous, that credit derivatives were out of control – but no one was listening. So when the credit crisis exploded it set the world on its ear and forced change; far-reaching, disruptive change with concomitant, painful withdrawal symptoms.

Incremental change, or life in the comfort zone, is a “dull advance over a long period of time that can add up to a great deal of progress,” according to Gerald Ashley, co-author of Two Speed World. Disruptive change comes from exceptional events such as wars, new inventions or financial markets meltdowns.

Ashley noted that disruptive change is not to be considered as an extreme example of incremental change. “Many decision makers tend to see most issues in incremental terms and on occasion, for example a financial crisis, they fail to understand that it is disruptive change underway that demands different analyses and approaches to those that they employ in normal times.”

Disruptive change is the most feared and the least understood type of change and “may receive more attention than their importance warrants relative to the incremental changes of everyday life,” said Ashley.

The financial crisis, given its severity and danger to the world economy, probably deserved the attention which has led to draconian changes in regulation and processes in many countries. Though not always welcomed, new regulations are necessary to rebuild the health of financial markets and to prevent another such disruptive change.

“Disruptive change should be treated with respect, not feared, because it is disruptive change that drives progress,” said Ashley, who once worked for Baring Brothers in London and Hong Kong and the Bank of International Settlements in Basel, Switzerland.

Incremental change arises from routine, doing what you have done on many occasions before. Many people may strive for more excitement and variety in their lives but in practice most of their lives and experiences tend to be within a narrow compass, said the book. In the case of financial markets, too many firms relied on mathematical models that used historical data and scenarios that were based upon short windows of time and the incremental changes that took place therein.

“Mathematical models were based on economic events in a very narrow window of time, as short as ten years. Bankers did not incorporate cross-correlations where the effect of adverse events in, say, the mortgage market, might trigger a move in others,” said Ashley.
Most people live from day to day in a world of incremental change and do not expect to be much affected by disruptive changes. The financial crisis and resultant global recession proved that disruptive change can be right around the corner. “Every person and business should regularly review their situation and not assume that the future will continue as a simple extension of the present state. Even disruptions that eventually are a benefit to all, produce some short-term pain.”

The book explores the development of the classical techniques for handling change that were developed in the second half of the twentieth century. Ashley and co-author Terry Lloyd worked together in the 1990s in the financial information industry, but came from different backgrounds. Llloyd, with an engineering and financial software background, has worked for Rolls Royce Aero Engines and Digital Equipment Corporation (DEC) among others. Ashley’s background was international finance. The combination of technology and wholesale banking expertise gives the co-authors unique insight into changes in modern financial markets, as well as the world in general.