Monday, August 18, 2008

Forecasting Crises: MBA Students and Skyscrapers

Economic models are notoriously poor at forecasting severe downturns. Here are some studies that identify the kind of behavior that suggest that a crisis might be around the corner.

Broughton, Philip Delves. 2008. Ahead of the Curve: Two Years at Harvard Business School (New York: Penguin Group).

272-3: "The job statistics for our class showed that 42% went into financial services, ranging from investment banking to private equity, venture capital, and commercial banking. 21% went into consulting. There was then a steep drop to technology and telecommunications, with 6%. Pharmaceuticals, consumer products, retail, and other manufacturing each drew less than 5%. Nonprofit and government accounted for less than 5%, half of whom were part of an HBS program to place students in nonprofit and government jobs and subsidize their salaries to bring them in range of the for-profit sector. 80% of the class took jobs in the United States. The total compensation for my class in its first year out was $138,125. Ray Soifer, a graduate of the class of 1965 and a banking analyst, had been keeping track of the relationship between the condition of the American equity market and the percentage of Harvard MBA graduates choosing careers in financial services. 10% or less was a long-term buy signal. 30% or more was a long-term sell. The choices of the class of 2006 told you the markets were soon to crash."

Michael Lewis seemed to have stumbled on the model earlier.

Lewis, Michael. 1989. Liar's Poker: Rising Through the Wreckage on Wall Street (NY: W.W. Norton).

24: "Forty percent of the thirteen hundred members of Yale's graduating class of 1986 applied to one investment bank, First Boston."

Poor, Meredith. 1998. "Twin Towers: Letter to the Editor." Scientific American (April).

The skyscrapers of the 1930s (the Chrysler Building and the Empire State Building) were built just as the Great Depression took hold of the U.S. economy. The World Trade Center and Sears Tower were also leading indicators of the economic malaise of the 1970s. And just as Malaysia completes its showpiece, the Petronas Twin Towers ["The World's Tallest Buildings," by Cesar Pelli, Charles Thornton and Leonard Joseph, December 1997], the economy of the region dives into disaster. In retrospect, this should be no surprise; during these periods, symbolism took great precedence over substance.

Soon picked up by Business Week

Koretz, Gene. 1999. "Do Towers Rise Before a Crash?" Business Week (17 May): p. 26.

Andrew Lawrence of Dresdner Kleinwort Bensen in Hong Kong found a close relationship between the construction of grandiose high rise buildings (reflecting excessive optimism) and subsequent crashes.


reason said...

Shanghai? Dubai?

Anonymous said...

"The total compensation for my class in its first year out was $138,125." Wow! That's not all that much. How many were in his class? 10? 50? Even $13,812.50 is less than minimum wage in some states.

Myrtle Blackwood said...

It appears that the state of the environment is a good indicator for the presence of an 'economic boom' (better called 'a rise in wasteful practices of overconsumption linked to overproduction').

"60 acres of tropical forest are felled worldwide every minute....50,000 square miles of tropical forest are being cleared every 12 months — equivalent to one Mississippi or more than half a Britain.... " [That figure, of course, doesn't include the temperate rainforests that are being clearfelled in other parts of the world, such as in australia]

World loses trees at 'alarming' rate
By Edward Harris, Associated Press. 3rd February 2008

The Coorong (the mouth of the Murray River, australia's largest) is now dead. Over-allocation of water for the irrigation of export food and cotton and woodchip (paper) crops.

From: The Sunday Age, February 2008, at:

"Malformed seashells show that climate change is affecting even the most basic rungs of the marine food chain—a hint of looming disaster for all ocean creatures—experts say. . ."

Climate Change Hitting the Sea's Little Guys Too. Graeme Stemp-Morlock for National Geographic News
February 29, 2008