James Drogan

Re Conversations with Dave

The following is an excerpt from a long conversation with Dave and others regarding economic and financial developments. I'm not trained in any of these arcane arts, being but a simple homeowner with a mortgage and other bills. However, I do try to understand.

For other useful views I suggest Dave's blogs, bizzXceleration: Performance, Value and Profit and Parts, Structures, Systems and Outcomes.

Here's the excerpt.

One other musing.

One is willing to take on risks of increasing impact as the understanding of these risks improves. There is a frontier of maximum risk below which one is more or less warm and fuzzy, above which one ventures at his peril. It seems reasonable to me that this frontier is a function of company and/or regulatory policy. Further, it ought to be more or less easy to set (e.g., limits of purchasing authority is a somewhat complementary example).

Moving to the northwest is tempting fate and crossing the boundary ought to be penalized. On the other hand, moving to the southeast would tend towards conservative performance. The culture that sets the policy for operating in this area is a function of the company and the industry.

Intentionally rotating the boundary counterclockwise implies the need for new knowledge, skills, and experience. If the firm doesn’t have these or can’t get them, then it shouldn’t change the slope of the line. Further, as one moves northwest, the set of people with appropriate knowledge, skills, and experience becomes smaller. That is, not everyone can go who might wish to go.

Increasing impact comprises the costs of failure and the rewards of success. There is likely not a proportional relationship between these.

Hence, what has happened is that the unqualified supervised by the unqualified and regulated by the unqualified have crossed the frontier in search of the Holy Grail only to find the dragons. As you so eloquently put in an earlier note, the fortunes of others were tethered to these searchers and, consequently, they were unwittingly pulled across the frontier. A large portion of the global economy is northwest of the frontier, it’s not clear how it will get back to safety (and at what cost) and therein lies our problem.