I said this to my brother-in-law (Dave) at the weekend – and then went on to clarify. Other than the two articles in the new Wired magazine that I’ve commented on already, the other very interesting read was one quite compelling explanation for the current financial crisis and it is indeed to do with a man called Dave. 

David X Li is a Chinese mathematician who emigrated to Canada and while working for Barclay’s Capital in 2004 invented a new formula for managing risk – which ultimately led to the growth of the subprime mortgage market. The Wired article gives an excellent analogy (you can read here) to explain the thinking behind the formula but the bottom line is that although, on face value, it is a persuasive concept it didn’t work and now we are all paying the price.

The big problem here however is that the formula wasn’t just tested out by one or two traders – it was adopted by every single trader. As the article states more accurately, “David X Li can’t be blamed. He just invented the model. We should blame the bankers who misinterpreted it”

To me this is one of the biggest and most explosive examples of ‘Groupthink’ in history. The speed with which the world now operates and the complexity and immediacy of the computer and communications systems we are surrounded by, means this was a scenario just waiting to happen. There is also something here about American business culture in particular that I have personally experienced, having worked for US run organisations for a fair chunk of my career. That ‘can do’ attitude that has built many a successful business can also backfire spectacularly when it is at the expense of ‘critical thought’ and valid opposing viewpoints.

These same issues can apply on an even larger scale and make concepts such as ‘collective intelligence’ and the ‘wisdom of crowds’ – that are often fuelled by social media mechanisms but not always governed by clear thinking – as potentially quite dangerous. On this occasion, the US pioneering on the bleeding edge of technologies has provided a massive wake-up call!