Ask What Changed
By David Henderson
Many people are trotting out their pet theories for why the stock market has crashed in the last week. Some of them may even be right. But there’s one question we should ask of all of them: What changed?
Here’s what Charley Hooper and I write in the chapter “Ask What Changed” in our book Making Great Decisions in Business and Life:
Have you ever had a conversation like this? You point out to a friend that the stock price of Hunky Chunky Potato Chip Company doubled in the last six months. Then your friend explains, “Yeah, that’s because people love potato chips. Their love borders on addiction.” Or you comment that far fewer people are attending Major League Baseball games this year, and your friend’s explanation is that baseball is so boring.
Your friend explained nothing. If people love potato chips so much, didn’t they love them last year too? Then why wasn’t Hunky Chunky Potato Chip’s stock just as high six months ago? If baseball is so boring, why were so many people attending last year? To explain a change in some variable, you have to point to something else that changed, not to something that stayed the same. What did change? Are people disgruntled over the baseball strike? Did ticket prices go up? Have people fallen in love with another sport? Something caused the change you’re observing. The trick is to identify the key elements that changed and not the fundamental elements that didn’t. We doubt that baseball has gotten less exciting or that people just recently discovered potato chips. It is entirely possible that the popularity of potato chips and baseball ebbs and flows, but then the variable that changed is the popularity itself.
Why did the stock market fall? Could it be something that happened in China? Absolutely. Could it be a change in sentiment? Absolutely. But it has to be a change.