Explaining complexity with a good analogy

I would bet that most people not in finance (or with formal financial training) have glossed over countless news articles that explain the current credit crisis without understanding much of anything. If so, this one’s for you.

I got a heads up from an Acumen Fund Partner about a great article in Harper’s titled The Next Bubble: Priming the markets for tomorrow’s big crash. The article is about financial bubbles, and it eloquently explains why the next financial bubble might be in alternative energy. (It also shows with deft simplicity why those of us who bought our homes after 1996 were buying after the bubble started — and that it may take until 2012 for this to play out.)

While all of that made the article worth reading, what I liked most was a wonderful analogy that explains CDOs (collateralized debt obligations) and the financial contagion they caused. It is powerful because it takes a very complex concept and paints a concrete picture that gets the core principle across:

Consider the chemical industry of forty years ago, back when such pollutants as PCBs were dumped into the air and water with little or no regulation. For years, the mantra of the industry was “the solution to pollution is dilution.” Mixing toxins with vast quantities of air and water was supposed to neutralize them. Many decades later, with our plagues of hermaphrodite frogs, poisoned ground water, and mysterious cancers, the mistake in that logic is plain. Modern bankers, however, have carried this mistake into the world of finance. As more and more loans with a high risk of default were made from the late 1990s to the summer of 2007, the shared level of credit risk increased throughout the global financial system.

Comparing CDOs to effluents, and the inability of “cleaning” this toxin (read: loans that weren’t credit worthy) captures the essence of the financial contagion — and yes, that makes modern bankers the bad guy corporate fat cats of old. As a bonus, the “hermaphrodite frog” leaves the reader with a memorable image as a mental point of reference.

For those of you who have a complex message to communicate, find a powerful analogy as your starting point. The analogy is packed with meaning, and it does most of your heavy lifting for you.

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