Friday, January 15, 2016

The Big Short demonstrates customer research

I don't know if you've seen the movie The Big Short, and if you haven't I won't spoil it for you.  It's a good movie, and gets to the heart of the financial meltdown attributable to CDOs and sub-prime mortgages.  If you lived through the stock market issues of the last decade, and are living through what the stock market is doing right now (feels somewhat similar, no?) then you can recognize that there was a shift in perceptions or reality.  At that time, the "given" that was suddenly no longer so certain was the idea that housing prices were firm, and would always go up.

The Big Short is interesting as a movie about the financial crisis, but what I enjoyed (as an innovator) is the fact that one small hedge fund group recognized something wasn't quite right.  And rather than stand around in their offices in New York assuring themselves that the facts all lined up, they did their own research.  In this case they decided to go see for themselves whether or not the data suggesting that defaults were increasing was true.

In one of the most moving scenes in the movie, two of Steve Carrell's team go to Florida as the new home market is melting down.  They are stunned to see empty houses, even empty neighborhoods.  When they find one house that is occupied, it is a rental, and the guy living there claims to be paying rent regularly to his landlord.  Later, the two guys drive around and go into an empty house that has been abandoned.  The residents had left the mail on the counter.  The two guys go outside and see a pool, only to find an alligator in the water.  That's symbolic of nature taking the neighborhood back once it's been abandoned by people who can't pay their mortgages.

Customer Research / Ethnography

Now, the movie is illustrative of a larger point about the sub-prime meltdown.  There were signals in the data that the market for sub-prime mortgages was terrible and getting worse.  People in Wall Street and other financial services firms should have paid more attention to the data.  But anyone willing to leave NYC and go to Florida, or Nevada, or Arizona, or Southern California at the time could have interpreted what was going on. In other words, if more of the financial community had done some basic trend spotting and customer research, we might have been experienced less of a tragedy than we did. 

What did it take to confirm the problems with sub-prime lending?  Riding around for a day or two in abandoned subdivisions. Driving around with a real estate agent who is very keen to move houses, that simply aren't selling.  In perhaps the most interesting instance of ethnography I've seen, Steve Carrell's character finds out that, let's call them exotic dancers, are buying homes.  During a personal encounter with an exotic dancer (keeping this PG for the kids), Steve Carrell is shocked to discover that many of these individuals have multiple mortgages, because, what could go wrong?  I've never done ethnography quite like that, but Carrell and his team discover a lot, for very little cost, by simply going and finding out.  While this seems evident, you'd be shocked at how little actual interaction with customers, in their settings and in their environments, is actually conducted.

Carrell and his crew discover that the signals in the data are true, and in fact the underlying leverage is worse than anyone in the financial markets seems to know about.  This allows them (and others) to short the market, because they've got insight on a coming crash that the majority of the market either doesn't care about or ignores.  While this isn't necessarily an innovation story, it plays out like one, because a small team of people discover something that's emerging, discover an opportunity that will arrive soon, and use interactions with customers to understand and validate the opportunity.

Lessons for Innovators
Too many times corporations are just like the Wall Street bankers and financiers portrayed in the movie. They believe that everything is OK, that existing products and services are adequate and don't need to be radically changed or modified.  All the while little signals, trends and other data contradict those assumptions, and no one goes to find out the truth.  If the movie tells us innovators anything, it is to beware of commonly shared assumptions that are too good to be true, and to go find out the truth for yourself, which is easy, and shockingly, few people actually do it.

Movie Review

As an aside, I really liked the movie, which did a good job of explaining what caused the market expansion and crash.  The pacing was good and the human side of the crash was explored as well.  It doesn't hurt that some of the arrogant financiers got taken down a peg or two.  Frankly we are still feeling the effects of that market meltdown, and housing prices are in many places just returning to pre-meltdown values.  You should see this movie, if only to get a better understanding of how interrelated all facets of the financial market are, and why you should pay more attention.
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posted by Jeffrey Phillips at 7:38 AM


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