Power Curves

The McKinsey Quarterly is trying to start a conversation about the application of power laws to man-made catastrophes such as the recent global financial meltdown.  What can we learn, they ask, about predicting man-made disasters from earthquakes, tsunamis and forest fires, all of which follow established power law curves — a “head” of many low impact events and a tail of infrequent but high impact ones?  They point out that as early as 2006 some specialized mortgage companies were already in deep trouble, presaging the later fall-out in the broader market.

This discussion got us thinking about whether we could apply the same thinking to predicting reputation catastrophes.  What if we could identify sudden clusters and unexpected spikes in certain types of reputation crisis pointing to a larger break-out into a broader market of high profile companies.  We already know that some types of crises have copycat characteristics: whistleblower lawsuits, food tampering, sexual harrassment charges, for example.  In 2007-8, there was also a sudden spike in investigations related to the Foreign Corrupt Practices Act, prompting us to recommend that all multinationals take a closer look at their foreign operations to try to detect compliance failures.

We’ll revisit this topic when we have devised a tracking model to cover this interesting application of complexity theory.


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