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Think Global Act Local

More aspects today are inter-related then maybe expected

Over and over again I read in the media “surprising” statements like “the statistical risk analysis for the financial products doesn’t hold”, “PV manufacturers dump toxic production waste !”, “outsourcing production affects the design business !”. So has anything changed lately?

Uh, Yes and No. No the the underlying issues were there for quite some time and Yes we didn’t pay attention till they hit us.

Q: So why are they hitting us now and not before?
A: Through a change in communication and speed of information distribution, heavily influenced by Internet, and growing size, the underlying models became ineffective and made the negative effects visible.

Example: “the statistical risk for financial products doesn’t hold”

Particularly for statistics the relationship between the individual transactions and assets is important, with a correlation of zero a nice statistical approach can be taken. And a low risk is established by combining e.g. a number  of mortgages together and by spreading the mortgages over region and type and then making x individual contracts out of those. Let’s say there is 0.1% chance an individual mortgage can’t be paid any more and that it creates a 30% loss on that value. If one would buy such a contract that had 1 mortgage the risk of failure would be low, but the impact when it goes wrong would be high. Now take a contract with 10 chopped mortgages, 10 buyers would have a higher chance on failure (10 times as high) and still low (1%),  however the impact would be reduced by the same factor and be very acceptable (3%). So all good and well as long as the behavior of the owners of those contracts don’t ruin the statistical behavior of the underlying contracts.

When few buyers and sellers start to copy each other’s  behavior by first buying in high volume these contracts, it drives up the price without the underlying assets becoming worth more, this increases the impact risk by failure. Due to the high volume distributed over a limited number of buyers, the increased risk will show up faster. If then a few owners start to sell the contracts because they recognise the growing risk, due to mortgage payment problems, this could trigger in a short notice every owners to start  selling off their contracts. In theory this should make it interesting for other buyers, as the lowering price reduces the risk impact, however the sellers and buyers are from the same group and act like a group, so there are NO buyers, resulting into a melt down.

In other words a nice statistical risk spread product in combination with a market behavior with a positive feedback loop creates a system that grows bigger than healthy and which implodes faster than one can imagine, although it isn’t sure when a trigger will be strong enough to let that happen.

Example: “PV manufacturers dump toxic production waste”

This is more true in developing nations, simply because society there has less experience with the life cycle of industrialising. The developed nations have had their share of toxic wast disasters and had to spend a lot of  learning money to correct  and avoid the implications. If that cost of learning isn’t taken into consideration when moving production to other places the total production cost will be wrongly compared and the price has to be paid one day or another.

Example: “Outsourcing production affects design business !” 

Market economy advocates that production needs to be done where the cost is lowest, which makes sense if all the cost is considered. Unfortunately this hardly ever is the case. By eliminating e.g. production in one place and thinking that the creative design part can be kept is foolish. Simply because every nation will want to climb the food-chain as high as possible and by doing a lot of production you get ideas about how to do it better and will want to design products. Economies that lost their production capabilities, will also step by step loose their edge in design with respect to how to produce it optimally. Particularly when profit is part of the economic system and cost is handed over to society, it is easy to create the wrong trade-offs.

The above examples indicate different aspects of the consequences of not thinking through the full system. That’s why I believe that the “Think Global” approach is needed so that the whole system is taken into consideration, to assure sufficient stabilizing negative feedback loops (e.g. the more money you want to borrow above a certain level, the more expensive it gets, the bigger the manufacturing plant the more costly). The “Act Local” part assures that there is sufficient diversity in the implementation of where to act. The Internet makes it possible to establish dynamic virtual organizations that create designs and solutions that can be re-produced locally in smaller production facilities that allow smarter usage of resources. Smaller production units can work with smaller financial institution and create smaller risks. As a rule of thumb, the bigger the object the more important it is to produce it local to where it is needed.

Areas of short term importance

  • Energy must become much more decentralised and sustainable, this is possible with the German definition of Feed In Tariff  (So every government can use the German model as it is the best available see, so start there and improve on it).
  • Transportation must become sustainable, Israel has a very effective plan to achieve, could be copied for local usage. Moving to electric transportation makes most sense.
  • Energy neutral houses and buildings can be built for the same cost as traditional houses by using smarter system thinking and produce local building blocks  see.
  • Water should be heavily recycled locally as there is no new source, also the drink-water system is a safety risk due to is central production, anything could happen after it has been purified, while bottled water is redicoulously expensive and inefficient way (every Internet connection these days has a firewall for intruders, but the water supply is without one)

So all great opportunities for new infra structure business.

1 Comment on “Think Global Act Local”

  1. #1 Think Global Act Local – Ascama & Innovation | insurancebloopers.com
    on Jan 16th, 2009 at 11:04 pm

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