If you build it, they may not come

Dreams.pngThe story of the 1989 US movie Field of Dreams summed up the happy days of the economic supercycle that was then getting underway. Starring A-list players such as Kevin Costner and Burt Lancaster, its theme that “if you build it, they will come” came to define the era.

In the world of manufacturing, companies stopped worrying about end-user demand. Instead, they became convinced that growth was a constant, and that demand for their product could be modelled on a spreadsheet as a ratio to GDP.

Similarly in financial markets, banks abandoned the use of personal judgement and experience. Instead, they hired maths and physics graduates to build black-box computer models. Risk became managed via spreadsheets and complex ‘value-at-risk’ models.

The blog rather likes spreadsheets itself. But ‘garbage in, garbage out’ is a good definition of their limitations. Equally, it worries that the models only use relatively recent data, often from just the past 5 or 10 years. This is not long enough to capture the trends of even a single generation.

Now, of course, the models are starting to misfire left, right and centre. Demand no longer follows GDP growth, as we demonstrate in Boom, Gloom and the New Normal. Whilst JP Morgan’s $2bn+ trading loss is only the latest in a long sequence including US subprime and Lehman.

Field of Dreams was a great film. But it is time to make a break with its message of wish fulfilment. The hard truth today is that ‘if you build it, they may not come’. Nor can banks continue to run their business via computer models.

This is why the blog believes Unilever CEO Paul Polman’s message about today’s increasingly VUCA environment is so important. Volatility, Uncertainty, Complexity and Ambiguity are likely to be the theme for at least the next few years.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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