From Innovation to Exploitation

An interesting aspect of the recent financial market chaos is how innovation plays into the facts. While arguably simply bad lending behavior was at the core of the problem, increasingly complex (i.e innovative) financial instruments such as credit default swaps played a key role as well.

By Christopher E. Mandel

What intrigues me is what some view as the cycle of innovation that produces these bad effects.

I recently heard Mark Cuban say: first there’s innovation, then come the imitators then come the idiots. While there are many examples of this cycle of creativity ending in disaster, few to date are of such magnitude as the current credit crisis. Oftentimes it’s not bad behaviors as much as the way in which initial creativity and its success produces laziness.

Today’s good idea is tomorrow’s exploited idea. New products and services often have short lives. In fact most things have their “season” but creative capitalism drives imitation and as more and more imitators pile in for quick profits, it is all destined to be short lived, absent continuous innovation and improvement.

One of the keys to this cycle is the constant drumbeat for better, faster, cheaper and more. Author Richard Swenson in a book titled “Hurtling Toward Oblivion” makes a compelling case for this phenomenon. First his observations: that we are subject to profusion or the phenomenon of always requiring more of everything, forcing progress.

Continued on Risk & Insurance

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