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Brainstorms
The (OR)3 Model by Stephen W. PhilbrickI spoke on capital convergence at the recent Bowles Symposium. As part of that presentation, I created something I called the (OR)3 model. Several people found the concept interesting, so I decided to share the general concept. As with many concepts, there is nothing inherently new here; I'm sure virtually everyone has observed this, but giving it a name may be useful.
Many diverse phenomena, such as sales of products or acceptance of concepts, follow an "S-shaped" development curve. The curve starts at zero, when the product or concept is nonexistent. Then, in the early phase, there are a few proponents or customers. There may be a small community of "believers," but most people are unaware of the product or idea. The next stage is an acceleration of growth, as people begin to become aware of the product or concept, the media promotes it, and sales/acceptance grows rapidly.
Eventually, this growth has to slow. If it is a product, with sales growing at double-digit rates, the eventual slowing is a mathematical certainty. Any product whose sales grow faster than the economy as a whole has to experience a leveling off of the growth, or the product will eventually become the economy. So far, that hasn't happened. The upper bound on the acceptance of an idea isn't quite as clear-cut, but any idea, whether DFA or Just-In-Time, will eventually reach a saturation point.
The S-curved development pattern applies to products and services as diverse as radios, VCRs, air flight, cruise control, and the Internet. It applies to ideas such as biotechnology, nanotechnology, chaos theory, even DFA, and the integration of capital and insurance marketplaces.
Despite the ubiquitous presence of the S-curve, one might think many pundits had never heard of it. When the perception of products, services, and ideas is plotted against the actual use, a very different pattern emerges. At the beginning, of course, perception matches reality. I'll call this the Obscure stage, when the product or idea is nonexistent.
The next stage is the Recognition stage. A new product has been invented, a few people start using it, the inventor is talking up a storm, and finally it catches on and everyone starts talking about it. The use of the product is growing rapidly at this time, but the growth in perception is more dramatic because it starts out lagging the actual use.
The next step is the key step. Suddenly, everyone is talking about the product or idea. It's the next great thing, and everyone has to have one. Someone fits an exponential curve to the growth, and realizes this is going to take over the world in short order. This is the Over-Reaction stage, and it justifies valuations of companies selling pet food that exceed the GDP of modest-sized countries. Breathless commentators tell us that the Internet will be everywhere and do everything, that DFA will revolutionize and subsume all of actuarial science, and that chaos theory will reinvent the way we think about the world.
Shortly thereafter, Reverse Over-Reaction takes place. The incredible growth projections fail to materialize and the pundits quickly proclaim that the hype was never justified. Internet stocks crash, gene technology is deemed a bust, and pundits go searching for the next idea to hype. In the meantime, the product or idea is still climbing the S-curve. The Internet is still growing in use in many areas, people are still using DFA to analyze companies, and gene technology continues to produce stunning results, albeit now in the trade journals, rather than on the front page of the general newspaper.
We've reached the Rationalization stage, where the idea or product is very valuable, not quite at the astronomical levels projected in the Over-Reaction phase, but not as gloomy as the Reverse Over-Reaction phase. If we could only get the pundits to recognize the S-curve, and understand that the early explosive growth will slow down, we might not have the over-reaction in both directions.
