Why Lemmings Drown Themselves and Companies Go Bankrupt

Everyone knows that overpopulation turns lemmings toward the sea to correct the problem. That’s kind of  what happens in  stock markes from time to time. When irrational exuberance lifts stocks to unsustainable levels, investors destroy value by dumping stocks so fast that supply far outpaces demand and prices precipitously plummet. Too much of anything triggers correction in due course. It must be a law of nature.

No one would attribute the action lemmings take to correct their population problem to rational decision-making. So why should we regard matters on Wall Street any differently when investors sell off stocks in a frenzied rush to correct the Street’s valuation problems?

Wall Street’s behavior fascinates me endlessly. One company sneezes and a big sell-off involving hundreds if notm thousands of stocks occur. Often the opposite happens. One company reports quarterly earnings that beat analysts’ expectations and the whole category it is a part of rises. The next day, a competitor’s earnings report fails to meet analysts’ expectations and the whole category falls.

Remember when the Wall Street Journal ran a quarterly contest between two teams on picking stocks? The first team had four star analysts who named their top stock picks for the quarter. The second team had just one lonely soul.  He was a Journal reporter with four darts. The darts won an amazingly number of times.

It seems to me that we often amuse ourselves by contriving reasons for actions we take when all the while little of what we are examining reflects much involvement of our conscious selves, aka, our egos.

The ego is a wonderful thing. Without one, we wouldn’t know who we were. It is our conscious self. We also have an unconscious self. Freud called it the id. The id contains all our basic drives associated with the four F’s: fight, flight, feeding and reproduction.

Then there’s our super ego. It mediates information that flows back and forth between the unconscious self and the conscious self and tries to get us to do the right thing from a moral perspective. Thank God for the super ego. It puts the brakes on destructive behavior that we might be tempted into by drives welling up in the primitive, amoral id. The superego is the seat of our conscience.

A big problem with the ego is that it tends to get too full of itself. It wants full credit plus compounded interest on successes it believes it has caused to happen and full absolution for all errors in judgment, none of which it thinks it was responsible for in the first place. The ego is the generator of defensiveness.

So, if we can agree that our conscious self is only one of several actors in our decision-making scenarios – and often off stage at that – then we can move on to why colonies of lemmings and stock market investors (and companies they buy stock in) often act in self-destructive ways. It all has to do with the behavior that takes place in complex adaptive systems.

Complex adaptive systems are complex in that they are diverse and made up of multiple interconnected elements. They are adaptive in that they have the capacity to change and learn from experience. Everyone knows from the story of the dinosaurs that a specie's failure to adapt to humongous environmental changes is usually sentenced to extinction.

Every unit of organic life is a complex adaptive system. But complex adaptive systems may also be inorganic, though they can be as dynamic in their adaptive behavior as lifeforms. An ecosystem is an example of an inorganic complex adaptive system. The biosphere is another.

So why should any of us in marketing or any other sector of business be interested in complex adaptive systems? For starters, markets are complex adaptive systems. Consider the stock market. It continuously adapts to environmental changes: changes in the CPI, unemployment rate, currency exchange rates, consumer confidence and even the weather.

Companies are also complex adaptive systems, although one might add that failure to learn and adapt in the face of major changes in the operating environment is not unusual among business organizations. Dinosaurs were complex adaptive systems, but they failed to learn and change in response to cosmic changes in their environments. That happens to a lot of companies. Halicrafter (radios), Ipana (toothpaste), Teal (liquid teeth wash), Oldsmobile (cars) Pan American Airlines and Dumont (televisions) are examples of companies that ended up like dinosaurs in museums .

The human ego is one of the biggest factors behind corporate extinctions. The identities of chief ego officers often get so wrapped up with set ways of doing business they are unable to learn and adapt to new rules for survival imposed by the disruptive forces of major environmental changes.

Since I’m at the limit of my self-imposed word count for my posts, I’ll stop now and resume the discussion of complex adaptive systems in my next post.

Comments

[Susan]

I see your point about id and ego, etc., but unlike lemmings, some companies jump off of the pier knowing that the "bankruptcy law life-raft" is will save them. Others are thrown off of the pier by unfairly competitive buisnesses or unscrupulous individuals.

The reason that investors stay on with a company is that they trust them. When companies in a specific field betray that trust and are not caught and/or repremanded, investors jump ship throughout that regulatory system. It's a better option than getting sucked under and eaten by the sharks. As more companies evade regulation and lie to the investors, more investors will leave.

Those who don't leave risk ending up like me and thousands of other people who lost everything to companies like Enron and many others that don't get media coverage. I would try to list them all, but most of their tracks are covered and still the list would be way too long.

Certainly, I dont mind risking my hard-earned money on endevors that may succeed or fail. Those investments may sadden me, but they won't make me mad. The lying and cheating is what rightfully erodes trust.
Susie

[Susan]

I see your point about id and ego, etc., but unlike lemmings, some companies jump off of the pier knowing that the "bankruptcy law life-raft" is will save them. Others are thrown off of the pier by unfairly competitive buisnesses or unscrupulous individuals.

The reason that investors stay on with a company is that they trust them. When companies in a specific field betray that trust and are not caught and/or repremanded, investors jump ship throughout that regulatory system. It's a better option than getting sucked under and eaten by the sharks. As more companies evade regulation and lie to the investors, more investors will leave.

Those who don't leave risk ending up like me and thousands of other people who lost everything to companies like Enron and many others that don't get media coverage. I would try to list them all, but most of their tracks are covered and still the list would be way too long.

Certainly, I dont mind risking my hard-earned money on endevors that may succeed or fail. Those investments may sadden me, but they won't make me mad. The lying and cheating is what rightfully erodes trust.
Susie

[Nick Trendov]

Here is another perspective of lemmings drowning themselves, pendulums or adaptive systems.

The Borg.

We like the Borg have proceess sticking out of ourselves as we go through our day interacting with other people with their own processes. It is the processes that interact behind or underneath our obvious physical connection.

You can change as many processes in your life as you want as long as those you interact with can accomodate that change.

There is one main caveat, the soldiers under fire. They measure differently because of the stress causing them to attain a different spiritual state.

Many cultures provide tools to achieve that state at will and sometimes both states. My experience includes Vipasana at Spirit Rock, Yoruba ritual and Sufi practices. Plain old Western Orthodox chanting works as well. Oh...add dancing, art...

In my professional life I have moved from accounting (fully recovered) to sales (getting better) to a story teller.

The intersection of stories, numbers and Persona may help in the Neuro 'whatever' space and stimulate some thought.

http://numerati.wordpress.com

Cheers,
Nick
www.scenario2.com

[Sam Cheater]

You know I get so lost in the stock market and have failed to understand why someone (other than for the thrill or risk) would put themselves through that! They might be rich one day and broke the next...but hey it's their dollar!

[Bankruptcy Info]

Personally, I think that's one of the things that got this recession started in the first place. With the advent of the internet, and giving the everyday average joe access and ability to tade stocks, so many people thought they could become day traders, and found out how wrong they were after losing tens or even hundreds of thousands.

[hypotheek executiewaarde]

Yes,I agree upon the fact that most of the Companies have complex adaptive systems, although one might add that failure to learn and adapt in the face of major changes in the operating environment is not unusual among business organizations.
I think this is the transition from old unstable economic model to new era of financial system.