Mastering The Hype Cycle

In the book we show just how closely aspects of the dot com boom/bust followed the Hype Cycle.   Given where we stand today in the middle of the credit crunch – it is worth asking about the ‘innovation’ at its epicenter- the CDO (collateralized debt obligation).

I’m an IT industry analyst, I know nothing of complex financial market instruments but happily for the ignorant like me, the CDO has a fullsome entry on Wikipedia.  Here are some observations from the ‘market history and growth section’ of the CDO page:

• The first CDO was issued in 1987 by bankers at now-defunct Drexel Burnham Lambert Inc. for Imperial Savings Association.
• A major factor in the growth of CDOs was the 2001 introduction by David X. Li of Gaussian copula models, which allowed for the rapid pricing of CDOs
• According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totaled US$ 157 billion in 2004, US$ 272 billion in 2005, US$ 552 billion in 2006 and US$ 503 billion in 2007. Research firm Celent estimated the size of the CDO global market to close to $2 trillion by the end of 2006.

The first point looks to me like an originating fundamental invention.  The second looks like an technology enabled innovation trigger (’Gaussian Copula models’ apparently take some computing). The third looks like an exponential rise of hype to a peak of inflated expectations expectations. This has, as we all know, been more recently followed by an equally violent crash….  into a trough of abject disillusionment.

So what can the hype cycle tell us?  It’s likely there will be some sort of recovery for this financial instrument innovation.  Something, some force, some agency will work out how to fix it and make it work properly. It will get hauled, likely quite slowly, out of the mire and onto the beginnings of the slope of enlightenment.   If you are in that business, the hype cycle tells you that right now, you have a stealth opportunity to be part of that fundamental learning and repair process, while everyone else is turning thir back on the innovation.

Most probably, oneday, Just like the online-only business model, it will be rehabilitated and start delivering true value on the plateau of productivity.

The alternative hypothesis is that it falls of the hype cycle at this point and dies completely. I don’t know enough about financial markets to be able to tell.  But very few things fall off completely – in any domain.