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Published: February 24, 2009

 
 

Books in Brief

Fixing the mortgage meltdown, mastering disruptive change, inculcating a sense of urgency, and exploring drama at the Economist.


The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It
By Robert J. Shiller
Princeton University Press, 2008, 208 pages

Photo montage by Opto
Robert J. Shiller, the Arthur M. Okun Professor of Economics at Yale University, famously predicted the bursting of the dot-com bubble in Irrational Exuberance (Princeton University Press, 2000). In the past few years, just as presciently, he predicted the bursting of the housing bubble as well. His new book, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It, which appeared in September 2008, both explains the dynamics of investment bubbles and reveals why government efforts to stop the ensuing meltdown have failed.

After a brief review of the his­tory of U.S. housing policy, Shiller contrasts the comprehensive mea­sures taken in the early 1930s to stabilize that decade’s collapse in the housing market with what he calls the “ad hoc, band-aid” remedies administered since the current collapse began in the fall of 2007. He suggests three goals for any lasting solution to the problem: improving the financial information infrastructure; extending the scope of financial markets to cover a wider array of risks; and creating retail financial instruments such as “continuous-workout mortgages” and home-equity insurance to provide greater security to consumers. He outlines several ways of accomplishing these goals and reinforcing the social contract — the implied agreement that a society will protect its members from major misfortune. His contribution to the first goal has been to assemble data on the long-term performance of U.S. house prices, something that had not been available before. It reveals that between 1997 and 2006 real house prices (i.e., net of in­flation) grew by a staggering 85 percent. They will fall — it seems certain — for some time.

Shiller is a disciple of the pros­pect theory of Daniel Kahneman and Amos Tversky and the field of behavioral economics that it has spawned. (See “Daniel Kahneman: The Thought Leader Interview,” by Michael Schrage, s+b, Winter 2003.) He suggests that the housing bubble arose through some astonishingly casual — and false — assumptions about the history and future of housing prices, fueled by “social contagion,” a complex of social psycho­logical mechanisms that can overwhelm rational calculation, even in professional investors. These mechanisms were given free rein under the libertarian regulatory philosophy espoused by key policy­makers, such as then U.S. Federal Reserve Chairman Alan Greenspan, who essentially ignored them. The author suggests that studying models of the way diseases spread is a better way to understand this contagion than using the paradigms of neoclassical economics.

The Subprime Solution was perfectly timed to capture the demand for explanations of the housing market turmoil in 2007 and the first three quarters of 2008. But it was too early to cover the dramatic events of October 2008 and the much larger global crisis that followed. The author’s views, however, do presage what was to come. No doubt he is already working on a sequel, which will command a deservedly large readership.

 


The Innovator’s Guide to Growth: Putting Disruptive Innovation to Work
By By Scott D. Anthony, Mark W. Johnson, Joseph V. Sinfield, and Elizabeth J. Altman
Harvard Business Press, 2008, 320 pages

Leadership and innovation have been the most popular management topics in academic research and business media over the past few years, and Harvard Business School Professor Clayton Christensen’s theories of disruptive innovation have been the hottest ideas in this hot area. Now, with The Innovator’s Guide to Growth: Putting Disruptive Innovation to Work, a team of two consultants, an academic, and a business practitioner have produced a handbook — with a foreword by Christensen — that extends the theories to show how an established organization can grow through disruption. Scott D. Anthony and Mark W. Johnson are president and chairman/cofounder, respectively, of Innosight, a consulting company formed by Christensen and his associates to promote the concept. Joseph V. Sinfield is a senior partner of Innosight, as well as an assistant professor of civil engineering at Purdue University, and Elizabeth J. Altman is vice president of strategy and business development for Motorola Mobile Devices.

The great attraction of disruptive innovation theory is not only its basis in solidre­search, but also the compelling reasons it provides for the failures of large,successful organizations to in­novate and to protect themselves from disruptive attacks launched by much smaller competitors. Management complacency and incompetence, the perennial reasons given for this failure, are not a sufficient explanation. Clayton Christensen showed how energetic, competent managers can be led astray by following the best management advice and paying too much attention to their customers. The result is incremental innovation and, as companies at­tempt to go up-market to produce higher-margin products, a tendency to “overshoot” customer needs, open­ing the door for new competitors to take away market share by making cheaper, cruder products that are “good enough.”

The Innovator’s Guide to Growth is a model of clarity, presented in four sections: identifying opportunities, formulating and shaping ideas, building the business, and building capabilities. Chapters are devoted to each of the components of these topics. Opportunities, for example, come from identifying non-consumers — potential customers whose demands have been overshot by the product — and from studying the real needs that those people want the product or service to fulfill. Each of the book’s sections contains clues to a disruptive product offering that might meet a hitherto unfilled need. The book includes useful questionnaires, and each chapter concludes with a summary, application exercises, and a list of “tips and tricks.”

And yet, although one can’t disagree with anything the book says, it lacks the sense of excitement and discovery of three predecessor volumes that Christensen coauthored with colleagues. Why should this be? In part it’s because the advice is aimed at as broad a readership as possible, and is designed to be context free. This, in turn, affects the language used. English philosopher Gilbert Ryle made a distinction between what he called task or action verbs and achievement or success verbs. Kick and hunt are task verbs (they refer to doing something); score and find are their achievement counterparts (they refer to goals, desirable outcomes). The Innovator’s Guide to Growth is packed with achievement verbs — identify, develop, formulate, build, master — that sound admirable but offer no clue as to how to accomplish them in specific contexts. This problem is endemic to management handbooks and re­flects the limitations of the how-to genre more than any particular shortcomings on the part of the authors. 

 

 
 
 
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