Avatars of Innovation: Help for Staving Off Future Crises

With the stock market fluctuating like a surrealist seesaw and the world financial situation still in crisis, I started thinking about innovation: Did innovation get us into this mess? Could anything have been done to avert it? And perhaps most important of all, what could be done to avoid a crisis like this in the future?

Frankly, I don’t understand the world of banking and finance. So much of it seems like sleight-of-hand or even hocus-pocus. I was relieved to find an hour long podcast from This American Life called “The Giant Pool of Money.” Even though the program was broadcast on NPR back in May, it explained everything that got us into the financial mess that exploded into crisis a few short weeks ago.

According to Alex Blumberg and Ira Glass—the journalists who speak in this podcast—an innovation really did take place. Foreign investors wanted to invest in the U.S. Market and wanted to invest conservatively with a decent return. Fed Funds were only paying 1%. Mortgages, though, were paying between 5% to 7%. Here’s where the innovation took place: mortgages were packaged and repackaged as securities (bonds) and sold to these foreign investors. Voila! Wall Street created bonds that paid 5%-7%, and the investors wouldn’t even have to deal with the foreclosures.

This may sound like financial hocus pocus, but those foreign investors loved these mortgage-backed securities. The global financial market couldn’t get enough of them. That’s when things started to unravel. To create more securities, banks and brokers offered more and more mortgages to people who would not ordinarily qualify. The thinking behind that was, “the housing market is going up and will continue to do so. If these less-qualified mortgage holders default, their house will be worth more than the mortgage.” But when people started to default in massive numbers, the housing market started to drop, and the global financial market went into meltdown.

I’ve already written about how the financial crisis was a crisis in leadership. But I began to think that—if the financial sector could learn from their mistakes—could our Managing Innovation process help them in the future? I certainly think so.

Each phase of our Innovation Journey is represented by an avatar, each avatar represents the skill set and mind set for each phase of the journey. I think that the avatars of both the Exploring phase and the Committing phase of the Innovation journey could help avert similar crises in the future.

The Exploring phase is where ideas are organized, debated, and analyzed in order to understand them better. The avatar for this phase of the journey is the Alchemist. In medieval times, the Alchemist “pursued the transmutation of the imperfect to the perfect—an evolution that also moved the Alchemist from ignorance to enlightenment.” (1)

Two elements of the Alchemist mindset are skepticism and logic. Wouldn’t a healthy dose of skepticism possibly have averted the current situation? In sorting through an innovation, your organization needs people who can ask the tough questions. Questions like, “what happens to the securities we’re selling if/when people default on their mortgages?” And the alchemist needs to challenge assumptions such as “the housing market will continue to rise.” Instead of turning lead into gold, the Alchemist should be able to see lead as lead and gold as gold, not look at lead and say it’s really gold.

If the particular innovation proceeds unscathed through the Exploring phase, the next phase of the journey is the Committing phase; the avatar for that phase is the Judge. In the Committing phase, you stop asking, “what could we do?” and start asking, “what should we do?”   

The Judge is “always fair, but clear. He or she, in consultation with those whose involvement is critical, decides which ideas will be moved forward and which will be rejected or sidelined—making clear decisionsbased on the balance of probabilities, when not all the facts can be known.” (2) Two elements of the judge’s mindset are wisdom and prudence. If a faulty scheme managed to get past the skepticism of the “Alchemists” in your organization, the wisdom and prudence of the “judges” should hold it in check.

Unfortunately, the only avatar through the innovation of mortage-backed securities was King Midas himself. People sold more and more mortgages, and made more and more money, until the whole market came tumbling down. And it wasn’t just Midas who lost, all of us did. The only mindset was “We did it because everyone else was doing it,” and one of the chief skills in the skill set was fraud which—according to Blumberg and Glass—was ubiquitous.

I’m not saying the our Innovation Journey would have staved off the crisis; I think that claim is at least a little outrageous. But if we could all learn something from this it would be not to let Midas be the king, and listen to your Alchemistis skeptics and wise and prudent Judges when they ask the tough questions.

—Joel Kleinbaum

Which Avatar of Innovation are you? Take our brief quiz to find out.

(1)(2) Quotes taken from Managing Innovation: Optimizing the Power of New Ideas, B. Kim Barnes and David Francis, Ph.D, 2007