Straw theory: why firms don’t always bounce back

Published in the San Diego Union-Tribune, November 28, 2016

“The straw that broke the camel’s back” is a proverb that describes a seemingly minor action (a straw), which in turn causes an unpredictably large and sudden reaction (camel falls over and dies). The broken back is the cumulative effect of very small actions.

It turns out that the proverb has a strong basis in science — namely the concept of hysteresis. Hysteresis is the time-based dependence that explains why certain materials (magnet, rubber band, thermostat) deform (change) more slowly than the actual impulse, but also take much longer to return to their original state.

A genius pal and I were noodling on what causes people to suddenly “lose faith” in someone or in an idea. Your company is rolling along and then in a single moment, it becomes clear, even obvious, that you need to pivot, you need to fire the CEO, you need to sell the company, etc. Now the time it takes to get to that moment is often long and consists of many straws — but it is usually one final one that causes the cataclysm.

Another way to look at hysteresis is this: You keep adding straws, finally the camel’s back breaks, but if you take the last straw off, the camel’s back does not come back together quickly. It might take months for the camel to heal.

So here is the puzzle. It is the final straw that causes the decision, but taking the straw away, fixing the last comment at the board meeting, explaining the last sale that was lost or the financing that did not happen as stated, does not make everything all good again. Things don’t bounce back at the same rate they deform.

Think about a marriage. You are in love, you think she is in love — and then one day, you wake up and she is not in love anymore. And even if you finally put the toilet seat down, take out the trash, go to the market, fold the clothes, even make lots more money — the game is over, sweetie, and she is out the door. Gone.

Now I will concede that marriage counseling can work. Statistics show that about 50 percent of the time, the couples, after at least six months of effort, stay together, and the other 50 percent are sayonara. But it takes time and effort and commitment. And even then, the success rate is a toss-up.

So, let’s go back to the straw and the company. When the board loses faith, when you can’t raise new money because people no longer “believe,” then the solution is frequently harsh. Decisions are made rapidly, and they can appear impulsive, but the “straw” has been accumulating. And the reason we are slow to pull the trigger and pivot is that there is massive friction to change directions and restart. How are we going to co-parent the kids, and who is going to move out of the house?

In economics, it is the problem of scale. If you have 1,000 users, it is a nice cellphone app. If you have 10,000,000 users, you have a real company. Hysteresis explains economic performance. It takes a lot of money to launch an airline, or to push a country’s exports, but once you have overcome the fixed costs, then the next dollar or revenue is subject to much less “deformation,” meaning more of it goes to the bottom line.

Think about 2008. Things went south, then things got better — but they didn’t return to the same level. There was an increase in structural unemployment. People have memories, and they do not return to the same level of economic optimism.

Take the Wells Fargo issue about opening false accounts. The bank has apologized, is taking steps to rebuild trust, but it will take a very long time, and the bank will spend much more money than if it had not done the behavior in the first place.

Another poster child is Volkswagen and its $14 billion fine over emissions. The diesel fraud was discovered by a research professor at West Virginia University. Just a little straw floating slowly down onto a pollutant scale, and a reputation is shattered.

It is all about the consequences of our actions, and how quickly you can lose someone’s trust. But it is really never quick, it is a lot of straws over time, so count carefully.

Rule No. 488:  There are not many “do-overs” in life.

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