Marketing Failure: How marketers failed to explain ‘risk’

The world runs on risk, its monetisation and trading.

It is not hyperbole to claim that ever since the financial meltdown of 2008, we have been living in the world coping with the commercial equivalent of a post-traumatic stress disorder. Equity markets, mutual funds, bank capitalisation, trades – these are only words to define simpler elements, limited forms, institutions or instruments of risk. Risk – like its cousin, ‘probability’ – has had no social recognition commensurate to its role and relevance.

As it is, we humans have a poor intuitive grasp of risk, probability and exponential factoring. But even financial geniuses struggle to explain the instruments and ‘products’ devised in the past few decades. It follows that, likewise, even the regulators are unable to deconstruct it. People are unable to understand the fact that – at a meta level - they are only a counter on a roulette table where, in one moment they could be swept away.

Professors Fischer Black and Myron Scholes of Harvard, propounded the creed of this new religion of risk. They summarised risk in a simple, single equation. This Black Scholes formula or equation gave birth to the options and derivatives industry.

The entire worth of derivatives in market today will exceed many times the total tangible value of all assets on this planet. But marketing has been unable to explain and popularise this valuation of volatility. Had marketing taken the lead and explained the concept of ‘risk involved’, it would have significantly reduced the magnitude of the sub-prime crisis.

Instead, Marketing was actually deployed to create the lulling illusion of a better tomorrow.

Wall Street trading desks went to an exponential value creation curve with the invention of ‘securitisation’. It was a future trade, secured against something of present tangible value. Somebody must have asked why it could not be a mortgage. After all, it is essentially a contract with tangible value.

That’s it! The seeds of the 2008 financial crisis were sown. These two things: options and derivatives on the one hand and securitisation on the other, turned all things into an elegant form of gambling. Banking, trading, investment, financial management all became means to a punt.

In fact capitalism, in itself, was turned into a Las Vegas casino.

A safe sounding measure was developed to explain this game of chance. It was named risk adjusted 'return on capital'.

Risk became the fuel for business like never before. Not calibrated natural risk but an unnatural, deliberately toxic risk. Everyone imagined that they had a tradable, calibrated, ‘return-indexed’ level at which they could entertain risk. Some knew the route being run had disaster as destination. Even they couldn’t stop the roller coaster when everyone was roaring with joy. Every commodity from soya bean to cobalt was traded via derivatives. The very concept of ‘shorting’ was invented by Hayne Leland in 1976 and accelerated to its apex in the first decade of the millennium.

The biggest booster came when the plain vanilla home loan was chopped up and served like a salad. A simple mortgage was turned into a complex set of instruments on a much upped risk level. The trading was now about any future outcomes secured by the home owned by people- ordinary people – like you and me.

Yanis Varoufakis in his book ‘Adults in the room – My Battle with Europe's Deep Establishment’ writes accounts of how the banking establishment in the United States and Europe had effectively treated the entire economy and assets of Greece – a proud sovereign nation and a full member of the European Union - as one giant mortgage.

Above all failures, this is the one thing about the religion of financial risk that marketing has failed to or simply chosen not to explain - which is that all of us are involved in it, whether we like it or not. In the period since 1990, a billion people, mostly from China and India have emerged out of poverty but they are probably trapped into ‘abracadabra finance’ accompanied by the rise in relative and absolute inequality.

The world is richer now than ever before and that wealth is concentrated in the hands of fewer people than ever. Oxfam has shown how the world’s richest eight people own as much as the bottom 50% . Comprehend this - eight people own as much as some 350 crore people put together. In such a situation, as marketers, is it not our duty to explain risk to investors? This is something we shall neglect only to make the world melt down irrecoverably.

(Shubhranshu Singh is a marketing professional, business leader, columnist and a social and political commentator. He is global head of brand and marketing at Royal Enfield. Views expressed are personal.)