In recent weeks the BBC’s business editor Robert Peston has come in for criticism about his role in breaking stories of banks in trouble (see for example these stories in the Daily Mail and Guardian).

Peston was the first to break the story of Northern Rock’s shortage of cash. The bank had enough assets to cover its obligations, but the credit crunch was making it hard for them to manage day to day operations. Peston’s story was quickly picked up by other news media. In the days following, queues of customers wanting to withdraw their savings from Northern Rock became so large at times that police had to manage crowd control. The bank’s operational difficulties, on which Peston had reported, quickly turned into a crisis of epic proportions. 

In normal times banks can safely accept savings deposits on terms which allow rapid withdrawal, then lend that money longer term. Deposits and withdrawals tend to average out and temporary imbalances can be covered by borrowing from other banks. But if unusually large numbers of depositors want their money at once, the cash is just not there. The system works because we trust it. Our money is safe so long as enough of us believe it to be. The breaking story about Northern Rock’s difficulties did not just reflect events it played a substantial role in bringing them about.  This pattern has become familiar as the current financial crisis has unfolded; news has not just followed financial events it has often amplified them.         

Robert Peston.
[image by SouthbankSteve, some rights reserved]

Of course the title of this article is mostly a rhetorical flourish. It would be unfair and untrue to accuse Robert Peston of single-handedly causing a recession. However, it is very much the case that media stories on the current turmoil are not just reflecting events they are also creating them.

Two ideas from social psychology and sociology can be helpful in understanding what is going on here: social amplification and performativity.

Social amplification of risk is the process though which public perceptions of risks can be produced and magnified as a consequence of the ways in which hazards come to public attention. A key issue in social amplification is the interest key parties have in the story. For example, media outlets have an interest in generating high circulation or viewing figures and ‘scare stories’ sell. This media focus on generating headlines can thus be a key factor in amplifying risk perceptions. Indeed the Daily Mail's outrage at the influence of Robert Peston might be seen as a little hypocritical given that paper's role in amplifying risk perceptions of other kinds, not least in relation to health.

If I drop a rock, it will fall to the ground (or perhaps on my toe) whether I believe in gravity or not. Gravity is independent of my belief in it. But many ‘facts’ I believe in are social facts and are true only so long as enough people believe in them; the value of money for example. What you believe does not just reflect our social world it helps create it. Performative statements or beliefs are those which help bring about the conditions they describe.

What you believe does not just reflect our social world it helps create it

The beliefs we subscribe to about banks are performative. By trusting that banks are safe places to keep our money we help bring about the stability which makes this true. By trusting each other with funds, banks ensure the stable operation of financial systems which in turn helps make that trust justified. Equally though, when we withdraw trust we help bring about conditions in which trust would be ill advised.

What we all think and feel about our financial security will have important consequences over the next few months. If we mostly fear the future, stop spending, withdraw our savings from banks, this will be part of the process which makes our fears true. Likewise as businesses take a view on the future and take decisions about investment and disinvestment, new hiring and layoffs these decisions will have a part to play in bringing about the future market conditions which that view is based on.

The media have an important role to play creating this future; they are not just disinterested bystanders. Whether they like it or not, journalists are not just reporting a financial crisis, they are performing it.

For a detailed account of social amplification at work in relation to a wide range of public risks see here. [Please note this link is to a 2.63 MB pdf document which may take longer to download with some internet connections] 

A recent book examines the role of performativity in economies and financial markets: Do Economists Make Markets? By Donald A. MacKenzie, Fabian Muniesa and Lucia Siu published by Princeton University Press.

About the author

Mark Fenton-O'Creevy is Professor of Organisational Behaviour at the OU Business School. His research includes investigations into the performance of traders in financial markets, and the problems that occur when management practices are transferred from one country to another.

He is also a National Teaching Fellow, and Principal of the Centre for Practice-Based Professional Learning.

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It is clear that the banking and financial problems which have dominated the media since last year continue to cloud the economy and the wider business climate. What seemed like a problem localised last September to the North West of England, and caused by an even more remote US practice of pouring tons of dollars into the rather unpleasantly named ‘sub-prime mortgages’, was in reality the tip of a massive iceberg of financial poor practice and greed. The crisis is truly global but Britain’s four million or more very small businesses and self-employed appear to be particularly vulnerable.

Quarterly surveys conducted by the Small Enterprise Research Team (SERTeam), the independent small business research charity that is based in the OU business school (OUBS), revealed in the third quarter 2007 that, while less than one in five small firms had formal term loans from their banks, more than half were exposed to more volatile forms of credit such as overdrafts (28 per cent), credit cards (17 per cent) and re-mortgages (13 per cent). At that time, the economy seemed quite buoyant and small firm owners were more concerned about regulations and red-tape than they were about the state of the economy. By the final quarter of 2007, however, 30 per cent reported that they had been directly affected by the credit crunch, 60 per cent reported indirect effects (from customers, suppliers, and so on) and a very large majority of 85 per cent expected an economic slowdown, including one third who predicted a full recession.

Falling profits.
[Photo © Photos.com]

In fact, the current credit and property crisis has been building up almost unnoticed for some time. British Bankers Association (BBA) figures clearly show a sharp decrease in home purchases starting from December 2006. By March this year, home mortgage approvals were down to 35,417, less than half the December 2006 level and down more than 46 per cent on the previous March. The Council of Mortgage Lenders and the Federation of Master Builders confirm that, as mortgages become more expensive, house prices are on the way down. The Royal Institution of Chartered Surveyors (RICS) predicts a 40 per cent fall in house prices over the next five years. Indeed, this gloomy picture is confirmed by the Governor of the Bank of England, Mervyn King, who has warned that inflation is likely to remain two per cent over target for the next two years and that the booming ‘nice’ decade (no inflation, continuous expansion) is over.

This, of course, prompted comment that the ‘nasty’ decade is about to begin. With unemployment on the rise (the number of job seeker claimants has increased for the third month in a row), fears of a return to the ‘nasty’ early 1990s - the years of negative equity and business failures - are bound to grow. With private debt in Britain of some £1.4 trillion, British businesses and citizens are the most indebted in Europe (and, per capita, more in hock than the US). The UK accounts for one third of all EU credit card debt. Although an important source of business finance, particularly for the self-employed, this is very exposed to rises in interest rates and bank charges. Whether or not we are heading towards a repeat of the 1990s or worse, time will tell. What we do know now is that currently the sectors most at risk from the credit squeeze are the construction, financial and property-related/business services sectors (real estate agencies, surveyors, domestic repairs and so on).

Overwhelmingly self-employed or microfirms, they represent 44 per cent of all UK firms and some 28 per cent of all employment. The SERTeam Quarterly Surveys already show falling sales and employment in these sectors which will contribute to falling overall demand and spillover effects into other sectors. However, many of the smaller firms have shown in the past that they can be very resilient in recessions. They cut costs, reduce capacity and the larger ones do shed staff. The Quarterly Surveys conducted during the recession of the early 1990s revealed that owners tend to tighten their own belts first, cutting their own takings, and that they are reluctant to shed core staff (who, after all, may be family members). They keep their businesses ticking over, waiting for a change in fortunes when the recovery arrives, as eventually it must.

About the author

Colin Gray is Professor of Enterprise Development at the OU Business School, where he is responsible for research and teaching in small business and entrepreneurship.

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In these turbulent times, almost every firm is affected by factors beyond its control. The credit crunch and plummeting consumer confidence are behind a raft of recent reports of job losses and profit warnings. Yet three recent but very different examples show how some firms cope with market turbulence better than others. JJB, the UK chain of sports shops has announced big job cuts whilst General Electric, that exemplar of US business excellence, failed to meet its earnings forecasts. By contrast, Experian, the credit-checking firm, saw sales rise 21% even though its big bank customers pulled in their horns a lot. These differences, and what they can teach the rest of us, can be understood by management research.

The simple explanation is that firms like Experian had more foresight than the others. They read the runes of economic, political, social and other changes to anticipate the market and acted accordingly. Academics call these things the “remote environment”, in contrast to the “near environment” of customers and competitors. But the broader and more practically useful question is how did they do this; how do some firms manage to draw sense from the cacophony of the business environment?

There are three sets of management research ideas that help us to answer this question:

The first is that about how managers “scan” the market. This shows that we all do it differently. For example, some of us are ad hoc, whilst others are systematic. This research also tells us that complex environments need more rigour and process and that management teams need a blend of scanning styles.

The second is about how firms make sense of what they see. This shows that data, information, knowledge and insight are different things and the core skill is converting data into information, then into knowledge and then sieving valuable insight from a mountain of knowledge.

The final idea is about how managers create strategy from insight. This shows that it is a much intuition as analysis and that it often comes in a flash of inspiration. Managers need to gather relevant past lessons and synthesise them into a new vision of the future. To do this, they have to have clear minds and not get lost in the detail.

Put like that, it all seems common sense but, as Voltaire said, common sense is not so common. Many firms think market insight can be made just by throwing enough computing power at enough data. They get obsessed with algorithms and data collection and lose sight of the unique power of human beings to synthesise information from many different sources. Good firms, by contrast, follow some simple rules to avoid this trap, such as combining quantitative and qualitative data and using that data testing their long-held assumptions.

And the practical moral of the story? Don’t be fooled by the patter of the IT salespeople. There are mountains of good, and unbiased, management research about how to make sense of the market, research that helps you to be both forewarned and forearmed.

Further Reading

• Open University Course B201 - Business Organisations and their Environments.
• Strategic Intuition: The Creative Spark in Human Intuition by William Duggan, published by Columbia Business School Publishing,
• Creating Market Insight: How Firms Create Value From Market Understanding. By Brian D Smith & Paul G Raspin from Wiley.
• The Marketer's Stone by Dr Brian Smith, Dr Hugh Wilson and Professor Moira Clark, published in The Marketer, 2006 (article  available free on request)

About the author

Dr Brian D Smith is a Visiting Research Fellow in The Open University’s Marketing and Strategy Research Unit. He is the author of over 100 books and articles and runs PragMedic, a specialist strategy consultancy.

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