Recorded Randall Stephen Wright: Human picture. Randall Stephen Wright: Welcome to a Corona virus briefing with MIT I’m Randall right program director with MIT Sophos of corporate relations. I’ll access your host on behalf of MIT industry liaison program. Randall Stephen Wright: The Corona virus outbreak is first and foremost the human tragedy affecting hundreds of thousands of people. It’s also having a growing impact on the global economy. Randall Stephen Wright: This briefing is intended to provide business leaders with a perspective on the evolving situation implications for their companies and steps they should be taking now to mitigate the impact of the coven 19 pandemic.

Randall Stephen Wright: We have with us today. Three of MIT’s most prominent faculty members professors Yosef Sheffield Alex Pentland and Andrew low Randall Stephen Wright: To give us perspectives on supply chain organization structure and financial markets and insight and what firms should be doing now. Randall Stephen Wright: Let me begin by introducing Dr. Yossi Sheffi professor of engineering and MIT and director of the MIT Center for transportation and logistics.

Randall Stephen Wright: Today he will focus on the here and now and we’ll explore with us the covert 19 disruption in context of past disruptions and explain what company should be doing now as the epidemic is spreading Professor chef. MIT CTL & SCALE: Hello everybody, I’m Yossi Sheffi I’m the director of the MIT Center for Transportation, logistics in the next hour we’ll talk about business and supply chain impacts of the covert 90 Of course the first thing that the different tell you Is not to panic. And I’m not panicking, because my computer is not working so Just a minute. There’s a technical difficulty here. Arthur Grau: Yep, just click on the slides once with your mouse. Ah okay we got it back. So the first thing everybody tell you is not to panic, which of course is the reason for all the panic.

But let’s look at the whole MIT CTL & SCALE: Disruption the business are facing here in the context of business disruptions in general. So we have, you know, random phenomena like hurricanes and floods and natural phenomena we have, you know, accidents, we have a government and politics with Brexit and lots of other MIT CTL & SCALE: Trade Disputes and others, there are issues of non compliance and company don’t comply with regulations and it brings the disruption of business or a supplier does not MIT CTL & SCALE: Comply with regulation. Well, sometimes competition coming from left field without us realizing it. MIT CTL & SCALE: Of course, the economy. We’re now going towards a recession, but we’ve had recessions before MIT CTL & SCALE: 2008 comes to mind was a big disruption for all businesses, there’s issues of social discontent when people are in angry but using, for example, enemies for testing about the MIT CTL & SCALE: environmental issue now of course intention and disruptions be the strikes to be a terrorist attack.

And finally, we’re going to talk about pandemics, that’s the subject of today. MIT CTL & SCALE: So in order to put it in context. Let’s look at some history of some pandemics. So the AIDS pandemic, which is still slowly going on at 75 million cases at a death rate of over 40% the US flu, just in the US in the last year at 35 million people infected with about point 1% MIT CTL & SCALE: fatality rate the edge one in one was a very big disruption had about a billion people worldwide about 200,000 died. MIT CTL & SCALE: They bola is one of them are frightening one because of two thirds of the people infected died. MIT CTL & SCALE: Finally, we’re talking about the Spanish flu, with several people mentioned during 1918 MIT CTL & SCALE: About 1.2 billion people were infected 16 million people saying 57,000,070 million nobody really knows for sure about 5% fatality rate, but the numbers were enormous and this was hospitals look like. And this is where mass graves readings. MIT CTL & SCALE: So let’s now talk about how pandemics work and they don’t attack the whole world at once.

There’s an MIT CTL & SCALE: First cluster going on what we saw in China. It then dies down. Then we have another cluster study in dies down and another cluster study MIT CTL & SCALE: That’s what it looks like today. And if we look at the one of the dashboards. You see the clusters happening every day. Also, if you look at the lower right hand side of the screen you see the MIT CTL & SCALE: The top line the orange line is infection in China, the yellow line that goes like a hockey stick an infection in the rest of the world, Italy, and of course MIT CTL & SCALE: Around the around Europe in general and right now in the United States.

Just to understand what is the. There’s a lot of misinformation about the fatality ratio. So let me just mentioned that the the problem is, there are two Types of To two ways to calculate the fatality ration MIT CTL & SCALE: The first one is for country who are caught flat footed. They didn’t test in time, many undiagnosed infection and the results are overwhelmed medical facilities.

MIT CTL & SCALE: So this is what happened in one in China. This is what happened in what is happening right now in Italy. This is what is happening right now in France. MIT CTL & SCALE: In China, just understand during the Adobe province. There were about four and a half percent people died. However, in the rest of China, it was less than 1% because by then they were implementing all these say MIT CTL & SCALE: A measures to stop on the the pandemic around the world. You can see the difference between countries in Italy. It’s now over 7%, the number of dead people in Italy is staggering. MIT CTL & SCALE: South Korea is less than 1% because they started very quickly testing people following those that are that came in touch with those that became positive and then they, you know, have a very low mortality rate Iran. MIT CTL & SCALE: Almost 5% as a problem. But if you look at Switzerland or Denmark, they have very low percentage because they made a lot of CTL & SCALE: They took a lot of the measures Airlie, that is to take it early.

MIT CTL & SCALE: And just by comparison. There are several countries that are very aggressive measures me an experience no days where these Malaysia Qatar Singapore Israel and feel and Bahrain. MIT CTL & SCALE: None of this country. There are hundreds of of infection in this country. None of them experienced any there yet. MIT CTL & SCALE: Let’s now move to this subject of the stock supply chain impact. So first of all, comparisons that MIT CTL & SCALE: Between this disruption and others like the Fukushima meltdown.

The Thailand floods SARS mares Katrina and universities are all inaccurate and underestimate the impact MIT CTL & SCALE: The problem with the covered 191 119 are the impacts both supply and demand we so first is supply impact on talking about it a little more, but their main impact is going to be a demand impact. MIT CTL & SCALE: Part of the course is as you’re reading the paper in China today’s much larger element of the world’s GDP, so both supply and demand affect China there by affecting the rest of the world. But they may impact will be the demand reduction due to fear and social distancing. And of course, the media, the online high We are probably facing a recession. I let the two other speakers talk about it a lot more. But this is the so-called Black Swan.

The thing that he does from left three without any preparation. And let me suggest that even though this is different. There’s something that I call the undercurrent in principle, what are this MIT CTL & SCALE: Thomas The wrote in this book, Anna Karenina happy families are all alike. Every unhappy family is unhappy in its own way. MIT CTL & SCALE: So every disruption comes with its own litany of misery causes and cascade of effects disrupt not to disruption at the same however MIT CTL & SCALE: Management of every risk every disruption involved prediction prevention, detection response. They are generic preparation stage that should be taken in every disruption. MIT CTL & SCALE: These are applicable to supply chain issues and we will talk about it right now.

So first of all, the first thing that they want to explain this so called bullwhip effect. It tells us who will be the most vulnerable among businesses affected by the supply chain. MIT CTL & SCALE: What happens with a bullwhip effect is as follows. Assume that the retailer says consumer demand goes down by call it 10% MIT CTL & SCALE: The retailers to think. Now, it thinks that the demand will be done by 10% I’m just using an example number would go by 10% for a long while. MIT CTL & SCALE: It also has inventory, assuming that it will be 100% so it has to reduce for the future.

It’s order and it has to get its inventory down. So, instead of just ordering from the distributor. MIT CTL & SCALE: 10% less it order maybe 15 or 20% less the distributor to see 15 or 20% it has the same issue. It looks at its forecast. It looks at it inventory MIT CTL & SCALE: And it order from the producer maybe 25% less the producers over from the supplier even less. And it goes up and up the bullwhip goes MIT CTL & SCALE: Up and down this point we’re going down.

It also, you know, also late heavily. But the point is that the small suppliers in the second and third tier of the supply chain are usually small and cannot withstand the initial downdraft in orders. MIT CTL & SCALE: So the result is damage to the upstream suppliers. MIT CTL & SCALE: Just to give you some data during the height of the 2008 crisis, which was also a demand disruption. MIT CTL & SCALE: Us retail sale. We’re down 12% manufacturing inventories down 15% and manufacturing sales were down 30% a colleague of ours young friends. So, in Holland did a study on with using that data during 2008 tier one or two. It’s the suppliers immediately supplying to the MIT CTL & SCALE: To the brand owners relative to the end consumer day went down about 25% however people deeper into the supply chain on what we say what we call upstream relative to the end customers were down 40% MIT CTL & SCALE: And in fact, the Chinese immediately understood that this is the is the China Morning Post and this could be a death blow for small Chinese manufacturers.

So the Chinese government MIT CTL & SCALE: Told state bank to start loaning money at zero to very low rate sometimes zero to small businesses and reduce aggressively the taxes on all small manufacturing MIT CTL & SCALE: Now during 2008 Alan Mulally the CEO of Ford understood it very well. MIT CTL & SCALE: When he gave his MIT CTL & SCALE: Testimony to Congress, he did something that in some sense is amazing. He implored Congress to save it competitors, because he said if a GM or Chrysler will fail their supplier will fail their supplier will fail and their suppliers will fail. MIT CTL & SCALE: These suppliers are making, for example, Johnson control makes it makes sense for all the auto manufacturers, if it fails, nobody will have seats, including Ford so MIT CTL & SCALE: It asked Congress to help and make sure that these companies will be held Ford was not in a bed in a bit position Ted enough money.

MIT CTL & SCALE: But, to summarize, you say a collapse of one of our competitor would have a ripple effect across all automaker’s suppliers in dealer and loss of really 3 million jobs in the first year. MIT CTL & SCALE: So he was trying he understood his problem, the problem very well and trying to explain to Congress that it’s not only the MIT CTL & SCALE: One to call the OEM the original equipment manufacturer, the people who all the brand. In this case it’s the other company, but it’s all the supplier and it’ll affect an entire industry, we talk a little more about this later. MIT CTL & SCALE: First of all, let me give you some forecasts, which is always dangerous because in two to three weeks. You may find out that that was wrong. But be that as it may, so we started in. Let’s talk about supplies from China. In MIT CTL & SCALE: First of all, understood that supplies are coming by and large, the big quantities on ships.

They’re not flying on air. In any case, there’s no almost no flying, but this is not flying on air. It is coming on ships. So what happened is the following. In the Chinese New Year. MIT CTL & SCALE: There’s all businesses in China, almost grinds to a halt to a halt. It goes from the second week of January until the end of the till the end of January, beginning of February. So this is what happened in 2020 everybody went home. MIT CTL & SCALE: Factories the world over who gets the part and material from China, not to expect shipment during the Chinese factories closure so MIT CTL & SCALE: However, they expected shipment to restart right afterwards. So what we did, what would this world factory. The all over the world. They had enough inventory of parts and material in order to build their product to cover the down period, but not much more.

MIT CTL & SCALE: So, see what happens. Now let’s focus on the on China and its vicinity MIT CTL & SCALE: What happened is a week after the end of the end of the Chinese New Year. Ships from China, loaded with parts and material did not make it to North Korea towards the victim to South Korea. Before we will probably also didn’t make it to North Korea, but it was another problem. It did not make it to South Korea. What happened in Hyundai announced a week after the end of the Chinese New Year. That is closing factories in South Korea. 10 days after the end of the Chinese New Year. MIT CTL & SCALE: Ships laden with parts of material. We’re not making you to Japan Nissan announced closure of factories in Japan because it did not have parts. MIT CTL & SCALE: Let’s now look at the United States. It takes about Six, eight weeks to get from a factory of China to a factory in the United States.

What does this mean, this means that they MIT CTL & SCALE: If we take about the beginning of February. Sometimes, the end of March, big first part of April. We’re going to start having factory closures in the United States, whether it’s a you know, automobile parts, whether it’s an MIT CTL & SCALE: cleaning supplies, whether it’s aircraft parts. Whatever we’re going to start in many, many others. We’re going to start having a MIT CTL & SCALE: closures and inability to make the product in the United States for a while until the Chinese will start moving again. But remember, MIT CTL & SCALE: It will be not possible to fly. Many of these parts because we lost a lot of the air cargo capacity, just for those who not realize it. Most of the air cargo capacity is belly freight what’s called belly cargo that flies in the belly of passenger aircraft. More specificity aircraft and not flying to China. MIT CTL & SCALE: In addition, FedEx. UPS DHL all reduces their China services. So we don’t even have capacity to do even if we wanted it would be outrageously expensive.

Anyway, so it will be a while until these factories will start gearing up MIT CTL & SCALE: So what our corporate, what should be the corporate actions that companies should take right now. And we’ll talk about setting emergency management centers, we’ve talked about how to set up communication decision making protocol. We’ll talk about who makes authority, who has the decision making authority.

MIT CTL & SCALE: Reviewing the review of suppliers and review of products and customers. And finally, we will one MIT CTL & SCALE: Bullet point before last week talking one issue about finance that is tied to supply chain, know that the injury law, my colleagues. MIT CTL & SCALE: Will have a whole hour talking about financial issues in the context of the coronavirus and the last one we should blame for the recovery we should plan for being able to get up and go at the end of this, and we just mentioned, what should be done, then MIT CTL & SCALE: So first let’s talk about Emergency Operations Center. MIT CTL & SCALE: So the idea is, when you have a crisis. You want to Central information and decision making function. You want the decision makers have all the all the information to come to one place when people can talk to each other and maybe decisions. Now the pictures that you see here are Or the MIT CTL & SCALE: Illustration that you see here are probably not relevant for coronavirus because a lot of this in the case of the coronavirus will be done virtually but the but we need a central information decision making and one can have people in a room like this but spread them around, of course.

In this type of MIT CTL & SCALE: Of Emergency Operations Center, you have to worry about two things you have to worry about employees. How do you take care of employees? MIT CTL & SCALE: And how do you take care of the business ecosystem. And in many ways, this should be two separate teams because the mistake that many companies are doing this one. MIT CTL & SCALE: One team looks at both and you have to worry about both of them both of them are as important at the same time. MIT CTL & SCALE: When you talk about employees, you have to think about families, you have to think about children at home, you have to think about how to connect employees.

MIT CTL & SCALE: I continue to pay a lot of these issues have to be there by the age art in basically tied to the emergency operations center, of course, taking care of the business ecosystem is what we’ll talk about MIT CTL & SCALE: Later, how do you take care of customers. How do you take care of employees? How do take care of suppliers and so forth?

MIT CTL & SCALE: And lastly, taking care of communities. MIT CTL & SCALE: Corporations operate in certain communities and have to make sure that they offer their services to the community. So, for example, Google made it’s an MIT CTL & SCALE: online tools for collaboration free for businesses for the next three months or so many businesses are taking similar actions, giving their stuff. MIT CTL & SCALE: Free to people so they can use during the so they can keep business family relationship collaboration going during this crisis, just to give you an example. This is the Walmart emergency operation center during a hurricane. MIT CTL & SCALE: You see people sitting next to each other. It’s not going to happen. Now they’re going to see far away from each other, but this is tied to all their system. MIT CTL & SCALE: On the screen you can see what happens in every one of Walmart distribution center and stores and parking lot and the information comes to this place. MIT CTL & SCALE: This is American airline Operations Center something similar.

MIT CTL & SCALE: Let’s now talk about the crisis communication. Excuse me. How do you communicate what has to be done in case of a crisis. MIT CTL & SCALE: So first of all, you must have ready communication for all stakeholders, which means knowing who they are, have all the emails. Have everybody get on the on on similar collaboration tools at this point.

And so as I mentioned before, you have to worry about employees, you have to worry about customers, you have to worry suppliers, the media shareholders analysts in the community. MIT CTL & SCALE: You have to communicate with them continuously, for example, MIT every morning sense to all its employee a message about what’s going on and how life changing. MIT CTL & SCALE: What is happening, what is not happening. This is something and it says, Now, of course, MIT everybody at MIT has an email address and texts and so forth. And it comes on all channels. MIT CTL & SCALE: Important to speak with one voice, just one person speaks about the crisis and what we are doing about the crisis, of course, we have to decide who is in charge. MIT CTL & SCALE: We all remember after President Reagan was shot that Alexander Haig came on TV and says, I’m in charge. Turns out that according to the Constitution is not but they MIT CTL & SCALE: So one had to decide a priori.

What happens if the CEO of wholesale? What happens if other people in the organization are not able to function. Give accurate information. This is something that we own the maintenance in the United States but giving accurate information then exactly what’s going on. The one voice has to tell everybody exactly what’s going on not try to spin it, not trying to blame other people just tell the truth. MIT CTL & SCALE: Example of how not to communicate is the case with Malaysia airline the seven. The Boeing 777 that going into the Indian Ocean. On March eight 2014 Malaysian Airline 370 flights disappeared. MIT CTL & SCALE: Immediately the Malaysian went into a tizzy they started conflicting announcements and spoke with multiple voices. MIT CTL & SCALE: See the Malaysian Prime Minister was saying one thing, the Minister of Transport another the Inspector General.

The Malaysian police the Malaysian Air Force Base, the maritime enforcement Energy Department civil aviation. Airline representative or traffic control when he says all gave very confused information and nobody had the trust of the Of the people and of course the grieving relatives, but also the whole of aviation work, try to understand all of us should warn try to understand what was going on. What is what happened to a sophisticated state of the art airplane that fell out of the sky. We still don’t know. And of course, we have a problem with talking about how not to communicate in the US with the President. And I’m wondering what the people around, am I thinking. I think that This guy doesn’t really rely doesn’t really believe what the President is saying. And this guy gets really angry. So I don’t really know what they’re thinking that’s in my mind what they’re thinking. MIT CTL & SCALE: Now, decision making. MIT CTL & SCALE: Let me give you an example that I described in my latest book about risk management and resilience in 2011. That was the height.

MIT CTL & SCALE: Of the Japan disaster. Remember the tsunami. The EARTHQUAKE, TSUNAMI, and the nuclear disaster, so many of them have the GM suppliers in Japan. MIT CTL & SCALE: Were not able to supply parts. So, for example, at one point, the GM has no a city module that’s the solenoid that goes under the seat to warm it up in a in a cold weather so that no sitting couldn’t get couldn’t get the part that hits the seat. MIT CTL & SCALE: So, MIT CTL & SCALE: They had an Emergency Management Center, of course, but they were arguing about what to do if the vice president came in and made a decision bill vehicle without heated seats. MIT CTL & SCALE: Well, turns out a disaster. The problem we use that he didn’t see it go with letter so you build more closets. MIT CTL & SCALE: So, but the cloth and lead this mix affect the basic versus luxury model. MIT CTL & SCALE: So what happened is canceling the legacy meant all sub-assembly and component that went into this is becoming stranded in the supply chain somewhere.

MIT CTL & SCALE: In anybody who works in the supply chain, know that their worst thing is to have too much stuff going to a distribution center or a warehouse and you had all the legacy clogging the supply chain. MIT CTL & SCALE: They had it with a few other points. MIT CTL & SCALE: On top of it. MIT CTL & SCALE: You said you’re going to build a more basic in basic cars with a clause fit but dealers and in customers what they what they want. They don’t care about GM problems and they’re just not going to buy MIT CTL & SCALE: So the idea is now of course if you are an engineer or supply chain professional.

You’ll notice these and you will never make a decision like this. MIT CTL & SCALE: So the end the the mantra. One of the main conclusions from this MIT CTL & SCALE: Crisis GM that then they implemented everywhere is called swim. Your name, which means, in other words, this was Bill Belichick our, you know, beloved, Coach. MIT CTL & SCALE: Calls do your job. Don’t do other people’s job. Don’t swim in other people’s lives. Just do your job. If you are an engineer who deals with MIT CTL & SCALE: Seats you know what can and cannot be done if your supply chain manager will understand where stuff is coming from and where it’s going, you make the decision.

One of the most important MIT CTL & SCALE: Issues in this case is actually to keep the CES with the CEO and others in the way for making it for making decisions. MIT CTL & SCALE: They should talk to the media. They should talk to analysts and they should be fully informed all the time about the latest information. MIT CTL & SCALE: But they should not make the decision because I’m talking about sophisticated products like automobile with 10s of thousands of parts in 10s of thousands to hundreds of thousands of suppliers all over the world.

You have to know exactly what you’re doing when you’re making decisions. MIT CTL & SCALE: So let’s now talk about the next point, which is look at suppliers. You want to make sure that you still have supplies and you have a steady flow of parts and material into your factory. So you can build your product. MIT CTL & SCALE: So the first thing they have to do is supplier mapping. What do I mean by supplier mapping? You have to know where your stuff is coming from. Surprisingly, most companies know MIT CTL & SCALE: What they know is who the supplier is and they know where the headquarters of the supplier is because in the essay P system or other enterprise resource planning.

MIT CTL & SCALE: What you have is the address of where to send the check with a supplier send your stuff that’s not what you need. You need to know where the supply plants are MIT CTL & SCALE: Are there in one. Are they in South Korea, are they in northern Italy, where are the plans of the supply, not the fact that its headquarters in is in Luxembourg or Switzerland. This does not help you. You want to know where the plants are so you know if they’d be affected. MIT CTL & SCALE: Next thing you have to know about each one of these plans of suppliers, what do they make MIT CTL & SCALE: What parts do they make that goes into your product and how critical the spot is what I mean how critical. There’s a lot of things that go into this, but can you build your product without this part. MIT CTL & SCALE: Can you do have two other suppliers of this part in other parts of the world who can who can make it. Also very important is which product do these parts go into and which customers need this product.

So now you have to think about the next point, which customers are served MIT CTL & SCALE: It’s very important you want to decide. Let’s say you don’t have enough. You have to decide which customers should be served. And before we talk about Inventory level will talk later about what to do when you don’t have enough supply and how to decide about which customer to serve. MIT CTL & SCALE: But you have to check the inventory level, not only in your warehouse of plant but at your suppliers and their suppliers. Who has inventory, who can keep building parts and sending them to you. MIT CTL & SCALE: Capacity. Are they working at full capacity? Are they working at 80% of the capacity or 50% of couples? This will give you an idea of how many parts and how much material you can expect to come into your One affection facilities. If you want to have what we call visibility. MIT CTL & SCALE: This is something. This is not something new. Most companies are trying desperately to get visibility.

MIT CTL & SCALE: Into their upstream supply chain, what’s coming into them. I mean you know what you’re sending out to your customers. MIT CTL & SCALE: What what is what is much harder is to know what’s coming into you, surprisingly enough, even though every consumer when it gets the FedEx. UPS or USPS package can follow the package and track it. MIT CTL & SCALE: Most businesses cannot most businesses cannot follow something from a factory in China. All the way on the truck on the rail on the ship goes to go to your sport.

Go to customs goes on the railing goes on a track and get to their to their plan. MIT CTL & SCALE: It’s very hard to follow this as it turns out, we can talk about why it’s a lot of people are investing is a lot of money. It’s getting better. The problem is, what happened to the second year supply. What happened to the stuff that has to come into your supply can they know what’s going on. Can you know what’s going on. Even though it’s not coming to you. That’s what we talked about when we mentioned visibility and with.

There are some. There’s a lot of work on this with internet of things with new sensors and new capabilities. What to watch for Okay, lots of things to watch for in case of a disruption. MIT CTL & SCALE: Supplier may degrade quality, they may be under pressure. They want to serve you. They need the money and this stuff that they build us not have the same quality as material and it’s not approved have to watch for it. MIT CTL & SCALE: May delivery. They promised to send on a certain date they just can’t. So the liver is will be late. That’s why you want all these visibility. MIT CTL & SCALE: A huge problem is fix When there’s not enough supplies with supplies dry up companies start looking everywhere for alternative suppliers for alternate suppliers. MIT CTL & SCALE: Lots of a new supplier suddenly come online and on the internet and they offer fake stuff. They may offer us chips, for example, that may be repainted and sold his new chips, but they’ll fail as soon, you know, soon after I after you install them.

MIT CTL & SCALE: Lots of issues with this. And we saw this big time. We saw this doing the horsemeat scandal in Europe, we saw during the week we saw that the US Air Force, the MIT CTL & SCALE: Market and the people will be some of the most advanced just in the United States found out that they have fake chips in there in some of the systems. There are many, many cases like this. But what’s important is to watch for it during a disruption, because this is when they spike.

MIT CTL & SCALE: financial health, you have to watch for the financial health of your suppliers. If you depend on them they better be in business. So watch for MIT CTL & SCALE: Him in this not enough to wait for the end of the quarter. You want the best thing is actually to watch the news in their city in their area. MIT CTL & SCALE: To find out if there’s too much talking about redundancy and bankruptcy and going out of business, things like this of course called them all the time, be in touch with him. MIT CTL & SCALE: Finally, get ready to support critical supplier in 2008 we had many companies automotive companies in many others supporting week critical suppliers by other a investing in them.

Extending their own a MIT CTL & SCALE: Their own terms to this their own credit terms to these suppliers and many other ways. But the important thing is to make sure that critical suppliers, don’t go out of business because then you got a business, you cannot be staff. Think about it. MIT CTL & SCALE: Now, there are several problems with a supply chain structure. This is what a sublicense structure look like on the top, you see OEM original equipment manufacturer. Let’s assume that this is Ford Chrysler and GM so MIT CTL & SCALE: The first problem is opaqueness companies actually don’t know who is in the bottom tier of the top tier of the supply chain. So, if you look at the OEM imagine General Motors.

MIT CTL & SCALE: It’s know who it’s Tier one supplier. Let’s assume that one of them is we said Johnson control makes sense. This isn’t going to GM planted assembly, the cars, but MIT CTL & SCALE: Into Johnson control. There are companies who make all kinds of parts for the seeds. So this would be the heating modules that we talked about before. MIT CTL & SCALE: And upstream in the supply chain that lots of lots of suppliers who would make screws and these are, by the way. MIT CTL & SCALE: When you’re going to automotive especially screws that are actually regulated and he treated, but they sell to all the other companies and the OEM doesn’t know who is sending to them. Where, where this stuff is coming from? MIT CTL & SCALE: You know, every OEM know who is there, it’s still one suppliers are some of them would know, to, to, but many Tier one in many industry would not reveal who they MIT CTL & SCALE: Are and it gets to be very opaque.

When you go upstream in the supply chain. So the first problem is it’s very hard to know even what to watch for MIT CTL & SCALE: The second problem is that there’s could be vulnerability of an entire industry. MIT CTL & SCALE: For example, it could be that unbeknown to all these three dots original equipment manufacturers, they all depend on for some parts. MIT CTL & SCALE: On one supplier Tier three. They don’t even know who they are. We call it a diamond structure in the supply chain example like this was in 2012 a factory Ivana MIT CTL & SCALE: Ivana chemicals. It’s a factory in Germany blew up its supply over 50% of the automotive needs of the word need for automotive what’s called plastic 12 it’s a certain type of plastic that is very resistance to corrosion to You know the fluids to a lot of other stuff. It is 40 to 50 pounds of this is using every car around the world.

MIT CTL & SCALE: It was a disaster that almost brought the entire automobile industry to its knees terrorism, the industry. MIT CTL & SCALE: To its credit got together all the competitor got together under the guise of the automotive industry group and in Detroit brought together a lot of other chemical manufacturer DuPont, and many others who started making this stuff. So the auto industry did not come to a halt. MIT CTL & SCALE: I mentioned before, what do we do if there’s not enough supply MIT CTL & SCALE: So if you have limited supply you can do several things. You can allocate the goods. You can auction them. You can dilute them and you can shape the demand. Let’s talk about every one of those Let’s talk about our location. Excuse me, let me First of all, when we talk about location is Product.

Product triage. MIT CTL & SCALE: In many cases, the same parts may go to many different products that you make. So again, which product gets the part. How do you do it based on financial contribution which means the product with the highest margin based on product which you have a lot of Products already in the field. Based on products that go to the most important customers.

Based on fairness to everybody. MIT CTL & SCALE: Based on which customer really totally depend on you and go out of business without you. There are many, many considerations about which product gets the part and you have to decide this now before so you don’t have to make a decision and the crisis. MIT CTL & SCALE: Of course it works best if this consideration like margin vary across production customer. If they are, if you have, if they’re all the same run on product. So you just do it by filaments.

You give everybody the same. MIT CTL & SCALE: Same percentage of the product. But it’s never the case. Usually it’s very different between customers and product. MIT CTL & SCALE: So you give you an example again with General Motors with 2011 during the Japan crisis. So there was a shortage of engine controllers airflow sensors and brake control modules for all trucks. These parts are the same for all trucks. The GM MIT CTL & SCALE: GM made a decision is made a decision to close the Shreveport truck blend that makes the Colorado truck. This is the truck, shown here. MIT CTL & SCALE: Why did it make it because this is small truck GM makes a lot of money on big truck and very little victory loses some money on the small trucks.

MIT CTL & SCALE: So in addition to this, it had lots of field inventory, because it was not setting when it has a lot of inventory, so it will not affect the customers. So Jim decided to close the Shreveport plan for one week, of course, the MIT CTL & SCALE: Wall Street Journal New York Times of the skys falling GM is closing the plant. It was totally and utterly MIT CTL & SCALE: planned an orderly closing. As it turns out, once they decide to close it and start the process they found out enough extra parts and did not need to close, but by the time that you start closing of a plant. They had to close it for a week and then ramping back up. But it’s an example of product reaction. MIT CTL & SCALE: And an example of an auction is in Thailand France in 2011 was a huge flood in Thailand, you see on the factor is being flooded.

MIT CTL & SCALE: Thailand is the number one producer like 70 75% of the world disk drive are produced in this part of Thailand. MIT CTL & SCALE: So, Companies the companies that tend to part decided to get it to the customer wanted most now economists will tell you that this is the right way to make a decision. Western Digital was hit hard and sees get a demand stripping supply so cigarettes conducted auction and monk customers.

He who pays me the most will get it economists think is the right way to do it because it gives the product, the customer who need it most. Unfortunately, the response of the of the customer was this is profiteering and once the head to go to the secret, but when the crisis abated they all went back to Western Digital so it worked for a short term but not for long term. Dilution that’s an example there are many other examples, but they make your mark on the demand and high demand for his bourbon. So he decided to add.

Well, they said, attach more water to the burdens of 90 proof it became 84% of the CEO explain that to maintain the test, they had to dilute it a little bit. There was, that was a customer evolved one customer or my variable is being diluted so beam. MIT CTL & SCALE: Confetti and the wallet, a little more and have lowered their demand by not buying any more customer stopped buying MIT CTL & SCALE: The CEO. A week later, the CEO said, we’ve been tremendously humbled over the last week or so. By the way, this was not the MIT CTL & SCALE: Many other company diluted many products, for example, interviewed some of the material that goes to cheap, but of course it was well tested in work. It was not a problem. MIT CTL & SCALE: A there’s another. The last thing is substitution doing the Taiwan earthquake was excellent.

They’ll Introduce new model April in order to estimate demand took orders 460,000 specific computers. This specific Component. MIT CTL & SCALE: Dell had no pre-orders. So every could not sell what they promise, then use it so called postponements tragedy, it would not be a computer until you tell an order in hand. MIT CTL & SCALE: So it just raised the price of this computer that had the components in short supply, lower the price on this computer for which it head on depart and continue selling with no problem. Let me just say a word about finance and a lot more of it will be said by Andrew MIT CTL & SCALE: First of all, during recessions, as we seem to be going into cash is king. MIT CTL & SCALE: So in terms of supply chain, you have to think about paying later to suppliers who keep cash, you have to try to get an earlier payment from customer. Once you send them the Product, you have to reduce inventory. There’s a lot of cash died in inventory MIT CTL & SCALE: You have to delay any capital investments and of course when you increase the time you pay suppliers.

MIT CTL & SCALE: What for the health of supplier, you can do it with some suppliers, not, not with a weak one, of course, make sure the security secure credit line. MIT CTL & SCALE: And start thinking right now about the recovery. I’m not talk more about it because Angelo. We’ll talk more about finance. But let’s talk about planning for recovery. MIT CTL & SCALE: So the idea is to keep expertise in house to continue to pay for taking care of family allow for part-time work. MIT CTL & SCALE: Germany, Holland, change the label. For example, they want to make sure that workers with expertise are not going to leave the market, the one work elsewhere. So they allow for part-time work. But the big change was the unemployment would be paid for part-time work on a part time basis. And then let’s not forget and crisis is a terrible thing to waste and it’s an opportunity during a crisis for tough business decision.

It’s an opportunity for reorganization that you always wanted to do but There was a lot of resistance within the organization, there’s an opportunity to cut not performing products and customers. Under these circumstances, MIT CTL & SCALE: Finally, a note about the long term because I get a lot of questions about it will more companies move manufacturing procurement on shore out of China out of elsewhere, the short answer is yes, but not much. MIT CTL & SCALE: The reason is the Chinese manufacturing become so sophisticated. It’s not easy to replace and Southeast Asia, still has cost advantage being Vietnam Banga Banga lavish Indonesia, Malaysia, so it’s not easy to move on. Sure. MIT CTL & SCALE: So, but on the margin companies will not move. Totally but will balance their supply base and include supplies in different parts of the world, and maybe MIT CTL & SCALE: In the United States as well, or in North America, but not companies who source in the United States will do the same thing.

MIT CTL & SCALE: They will be afraid that something happens in the United States, by the way, like it’s happening right now and have some foreign dual sources as other sources elsewhere. So the company will pay to have more than one source. Some of them will be in North America. Some of them will be the answer. MIT CTL & SCALE: So finally, let me stop here and try to take some questions. If I get some and Just to just for the reading. I wrote two books on a supply chain disruption after 911 I wrote the resilient enterprise, they became came out in 2005. It’s called the my glasses. MIT CTL & SCALE: But it’s an overcoming vulnerability for competitive advantage and in 2015 10 years later, many of the companies that I talked to MIT CTL & SCALE: A came to me and said, Look, there are a lot more risks but they were also much better at it, we know what we’re doing.

So we should write another book. So I did. And in 2015 I wrote the power of resilience, how the best companies manage the unexpected. MIT CTL & SCALE: None of these talks about coronavirus about a lot of analysis of past pandemics. Finally, what you see down there. MIT CTL & SCALE: HTTPS Sheffield or mit.edu is my website. And if you go there and look on the link influencer post and many others, you’ll see on the front page. A lot of posts TV appearances was to journal articles and others. Stuff that I wrote about the coronavirus in the last few months. So with this, let me see if we can take some questions. Okay, there’s a question I have from Solomon. Say, we’ve been pushing for decentralization and pushing decision making to the lowest possible for quite some times we scraping all these with the move to centralization in a crisis.

MIT CTL & SCALE: Good question. Many companies have been a decentralized and moving decision making down. And by the way, it’s absolutely the right thing to do, especially in a crisis. MIT CTL & SCALE: But let’s separate between two things that separate between the information flow, we have to focus on the information and focus high level decision making. But the idea if something happened at the low level is particularly important. Not for this type of MIT CTL & SCALE: Of of disruption in this case it’s worldwide so MIT CTL & SCALE: knowing what’s happening on the part of the world, learning from what’s happening in other parts of the world. MIT CTL & SCALE: Concentrated in this information in one place is a good thing but then moving this information down to the decision making maker at the lower level of the organization.

So in general, absolutely is moving decision making to lower level organization is the right thing to do. But in this case, since it’s affecting the entire world. That was not a particular a particular location west to act fast. We have to learn from everything understand what’s going on around the world. Move the information down and unless it’s a decision, the fake the entire Corporation, which has to be done centrally decision can be made locally. So with this, let me move to the other question. Phillip asks a given the information overkill at President, my God, I’m hope I’m not part of it.

And what are the trustworthy source of information on seaborne and airborne logistics from China to the rest of the world. Okay. MIT CTL & SCALE: Right now we have a. The idea is, call your favorite suppliers, call your favorite A shipping company. MIT CTL & SCALE: Airline that you should be mostly forward errs, who are forward is for those who are not familiar with are the intermediaries that you MIT CTL & SCALE: arrange for you for either sea or air international shipping, they will have much better information because they talked to the actual airlines and shipping nine of the time. So, to me, the best source of information or this intermediary The Third party here in between the customer the retailer manufacture distributor, who owns the goods. And the the customer where you want to send the goods to in the middle, there’s a This forward.

There is third parties who can have the information all around. So my guess is that this will be the Source of this information. Okay. MIT CTL & SCALE: Unfortunately, I’m going to sign off. Now I’m going to Get off this now because MIT CTL & SCALE: I want to finish five minutes before the hour because we have to clean up the surfaces and I’m sitting in a very small close, you know, Audio booth and we want to clean it up and we want to air it out before the next presenter come. So let me stop here and invite Cindy to come in and So thank you very much. Go to my site. If you have a question, you can send them to My email shafi@mit.edu My site has more information sheffield@mit.edu thank you very much for listening.

Goodbye. Randall Stephen Wright: So we are going to now take a short break of about Randall Stephen Wright: Five minutes and then we’ll be back with Professor Pentland to talk to us about Randall Stephen Wright: Organizationally, what can we do about the spread of the coronavirus Ah, Randall Stephen Wright: Well, welcome back to a Corona Corona virus briefing with MIT. Randall Stephen Wright: Just have a few items to mention before we continue with Professor Petland we’d like you to use the Q AMP a feature that is part of the webinars so that we can take your questions. Randall Stephen Wright: And a recording of this briefing will be available on the web page that is the industry liaison Program Office of corporate relations web page for this group and virus briefing that you can access Randall Stephen Wright: Individuals with high are most at risk for contracting coronavirus that means executives, especially once in corporate headquarters.

What should executives be doing now to organize their executives and associates to minimize the spread with its attending work disruption of Randall Stephen Wright: How can you predict what parts of your organization will be impacted next drawing from his groundbreaking work social physics professor Pentland will outline what executives need to be doing now to protect their organizations from covert 1910 and Randall Stephen Wright: Professor Pentland directs MIT connection science and MIT wide initiative and previously help create and direct the MIT Media Lab and the Media Lab Asian India.

Randall Stephen Wright: He’s one of the most cited computational scientists in the world and Forbes recently declared him one of the seven most powerful data scientists in the world. Professor Pentland Working Why little presentation up and going here. See if we can do all this So I’m working Yes. No. Okay. Hmm. Okay, maybe someone wants to come in here and give me a little help. Because it doesn’t seem to be doing. MIT CTL & SCALE: A YC too many questions. That’s what it is. Okay. MIT CTL & SCALE: Good. Okay, good. Um, so with that on the way. See, there’s the difficulty in doing this stuff online. We’re all just learning so I’m MIT CTL & SCALE: I’m Alex Pentland I run a group at MIT, called the trust Data Alliance it spans the Media Lab and Institute for data systems and society and the Sloan MIT CTL & SCALE: Initiative for the digital economy and has many industrial and national sponsors and it focuses on analytics for your organization blockchain based data control AI on distributed data and more MIT CTL & SCALE: And so let’s let’s just get into it here.

Um, MIT CTL & SCALE: So the medical problem is reducing the virus spread. And so this shows a social network all the connections and the spread of the virus depends on MIT CTL & SCALE: How tightly connected, how frequently connected you are with people’s curses is the physical connection and the probability of the infection. And one of the things to notice is that most organizations are very hierarchical or centralized so the people in the center or the senior leadership. MIT CTL & SCALE: And they have the greatest risk because all roads lead to them. They also have the greatest risk because they tend to be older and have more medical comorbidities. So you got the perfect recipe. MIT CTL & SCALE: Mixing the virus with people at risk. So what do you do about this. Well, the standard thing you do is reduce travel so you break some of those links in the social network no meetings, you don’t have those clusters. So everybody gets MIT CTL & SCALE: Infected no physical contact. So it’s the physical contact, not the virtual, of course, clean surfaces schedule people at different times and move to video MIT CTL & SCALE: Personal hygiene is, of course, wash your hands.

Wash your hands. Wash your hands with gloves. I have these nice little gloves. They’re nylon MIT CTL & SCALE: They’re actually sort of evening gloves for cool night but you can spray them with isopropyl alcohol and that way you can have gloves that come in and on off easily without having them be disposable, and yet they get to be MIT CTL & SCALE: sanitized in more extreme cases, you need masks and gowns. MIT CTL & SCALE: And we know that those tend to be a short supply. MIT CTL & SCALE: Maintaining distance they at least six foot away actually six feet is only a sort of medium, it can be quite a bit further. MIT CTL & SCALE: That means, though, that you need to have very few people in very generous spaces which is expensive and you can’t have Q’s, so you can have people lined up to get in, like for instance at the airports last night. MIT CTL & SCALE: Airport itself was not very crowded, but people were all on cues to get their passports checked and their health checked. And then finally, MIT CTL & SCALE: A much more ubiquitous surveillance state than we are used to.

And that’s what they call it in medicine is surveillance. You want to know who did you come in contact with you need to follow that you need to put different data together. MIT CTL & SCALE: And then treatment protocols that are very rigid, so for instance in Taiwan and other places that have had real success at holding these people get sensed every time they go through a door if you have anything wrong, then you go to a separate room typically attend where you get the flu. MIT CTL & SCALE: Test if it comes back negative, then you get the coronavirus test and there’s no choice about this.

This is like you’re in the military. Now, MIT CTL & SCALE: Okay, we’ve seen that work in some places. MIT CTL & SCALE: It’ll be a question of how it works in democratic societies and particularly in the United States, um, MIT CTL & SCALE: The the real problem from this from a business and organization point of view is that information spread and virus spread are very, very similar mathematically and how they happen everything flows to the central people MIT CTL & SCALE: And normally, that’s good, because that means the central people have a greater view of what’s happening and can help make MIT CTL & SCALE: The organization move as a whole.

But of course, if this is through physical contact that also brings the virus along. So the obvious answer that comes to everyone is. Oh, well, let’s go virtual MIT CTL & SCALE: But this is not as simple as it looks. And I’m going to tell you why it’s not as simple as it looks. So probably almost all of you are doing some work at home some virtual meetings, you’re on a virtual meeting. Now you’re changing schedules. MIT CTL & SCALE: And that simple sort of medical way of thinking about it is really insufficient.

If you’re going to continue to have a functional business. MIT CTL & SCALE: So what are some of the problems. Well, the problem in most businesses, perhaps the biggest one is that informal communication or about half of decision quality. MIT CTL & SCALE: So this shows information flow in German bank five departments, the blue stuff is all the formal communication in this case email paper, things like that. MIT CTL & SCALE: And the red is conversations in the halls and what we did is we put little badges on people to measure these informal conversations.

And it turns out that MIT CTL & SCALE: Success in coming up with new initiatives productivity is far more dependent on the informal stuff than it is on the formal stuff. MIT CTL & SCALE: So when you go virtual you get rid of all this meeting in the hall meeting around the coffee pot, etc. And as a consequence, if you continue in the normal way your decision quality is going to be hit very seriously. MIT CTL & SCALE: Another one that people are not so aware of because we tend to have the wrong attitude about it is that mental health depends on this sort of social communication and it’s much more affected by face to face stuff than virtual face to face is far more powerful.

MIT CTL & SCALE: Because it has all these informal parts to it that tell you what the person is really thinking MIT CTL & SCALE: And a general rule is a mental health depends on two ways useful social interaction, just as your body health depends on repeated physical exercise. MIT CTL & SCALE: So what that means is that not only do you have to have the ability to reach out to people and talk to them about what’s going on. But you also have to feel like they’re reaching out to you. MIT CTL & SCALE: And that sort of two-way interaction. When you’re a part of a little team your buddies is critical for health. It’s in fact the biggest predictor of mental health. MIT CTL & SCALE: And the thing which probably has the biggest impact in terms of innovation loneliness really does result in mental disease. MIT CTL & SCALE: So when we all work at home.

We talked about, oh, the loneliness isolation but this is not just you know heuristic. It’s not just something that is common sense there’s actually a medical process going on here so that you have to respect. MIT CTL & SCALE: Another problem that probably the people on this webinar aren’t very sensitive to is the problem of solidarity. Are we all in this together well people under 30 essentially have very little risk of dying from this. It’s very similar to the flu for them. MIT CTL & SCALE: In terms of mortality risks and a lot of them. So why should we self isolate. Why should we hurt our careers? Why should we do these things? MIT CTL & SCALE: And so you’re beginning to see these sorts of problems and you can meet this either with force. So you measure these things cops come in. You fire them whatever which has lots of negative effects of course MIT CTL & SCALE: Or you can show them that mortality is not the only thing that’s going on here.

So even though if you’re young, you’re unlikely to die from it. MIT CTL & SCALE: You may have to be on a ventilator for two weeks and it will disrupt your life for months. So for instance, in Italy, where the outbreak is really bad. MIT CTL & SCALE: The advertising for self-isolation social distancing shows young people who are in the hospital on ventilators and interviews them.

MIT CTL & SCALE: About the horrible experience. It is so they didn’t die, but they certainly suffered so it brings the value home to them. And of course there are other sorts of messages you can have two to bring home the fact that we need to be together in this we need some solidarity. MIT CTL & SCALE: I mentioned a little bit earlier. But part of the problem with solidarity, some of the problem with MIT CTL & SCALE: Mental Health comes down to a problem of trust. You have to have trusted relationships in your organization easy is not a function of MIT CTL & SCALE: Transparency or predictable sort of procedures. It’s really a very personal thing which is is that I know that if I do a good for you.

You’re going to do a good for me. MIT CTL & SCALE: So it has to do with the frequency of having those sorts of interactions that produce this attitude of trust, where you’re willing to go a little bit extra MIT CTL & SCALE: That little bit extra results in solidarity, it results in better decisions that result in almost everything you want. So you need to somehow have these MIT CTL & SCALE: Interactions between pairs of people, not the group pairs of people that are valuable to both of them. And so encouraging that is tremendous. MIT CTL & SCALE: Also, if you’re going to change behavior that you need to do rather drastically.

In this case, MIT CTL & SCALE: By far, the best way to do that is through these personal trusted relationships as opposed to monetary incentives or rules. MIT CTL & SCALE: Or speaking to a group. So social incentives were presence, a group of people, their friends are rewarded for all helping each other is a far better strategy than just making a rule or having penalties. MIT CTL & SCALE: A final problem that we forget all too often is that facts don’t change behavior.

MIT CTL & SCALE: Daniel Kahneman the Fast and Slow Thinking the nudge thinking makes the point that about 5% of our thinking is rational and the rest of it is automatic and habitual MIT CTL & SCALE: And that automatic and habitual is most of what we do. It’s the problem here. And strangely our rational mind really doesn’t communicate with our habitual mind. So think about how hard it is to stop smoking. Think about how hard it is to do many sorts of habitual things MIT CTL & SCALE: That’s why social pressure social context is so important because that’s essentially where this intuition system one stuff comes from MIT CTL & SCALE: People tend to do what the people around them are doing. They want to fit in. And so, making it the social norm is a far more powerful way to change behavior than giving them the facts.

MIT CTL & SCALE: So in summary, normal procedures have really serious problems. No Contact hurts decisions mental health trust solidarity. MIT CTL & SCALE: Personal hygiene is really hard because facts don’t get into our habits very easily. Also, many workplaces having adequate facilities for this. There are no wash basins every 10 feet. MIT CTL & SCALE: So you have to get in a crowded space a bathroom to be able to wash your hands. Well, that’s sort of self defeating maintaining distance is expensive. That’s real estate is rented. MIT CTL & SCALE: Is often impractical, because you’re servicing machines or helping fix things or something that’s physical that requires humans to be close to each other. MIT CTL & SCALE: You can work on that. You can schedule things differently. But it’s not as easy as it sounds, and the ubiquitous surveillance and rigid protocols are very much anti, not just the sort of democratic sense of things, but the sense of young people in particular where MIT CTL & SCALE: You know, they’re worried about Google and Facebook and data being everywhere.

And so this really is a sort of nightmare, where you have the robot overlords watching people and people will react poorly to that showers. MIT CTL & SCALE: So you really want to involve people in the decisions to be transparent, let them know and get you have to be able to accomplish these things. MIT CTL & SCALE: So the bottom line is, this is one of them call a wicked problem. It’s one that doesn’t have our solution. MIT CTL & SCALE: You somehow have a flow of ideas necessary for the organization and that is fighting the flow of virus, which is necessary for health and both of those are fighting mental health and trust and solidarity, what are you going to do MIT CTL & SCALE: But the key thing is what you often do in business is you have to maximize one minimize the other and maintain a certain level of interaction for mental health and trust.

MIT CTL & SCALE: So it’s, it’s not just do this like the medical recommendation, you’ll have to balance these things and to balance them you have to measure them and you have to major in them. Continuously so MIT CTL & SCALE: For instance, for the idea of information flow in your organization. You have to keep track of how the conversation that information that decisions are flowing MIT CTL & SCALE: Versus the information infection flow. How the physical contact and exposure are happening and then try to balance them. You can also try to lower the cost of MIT CTL & SCALE: Decision making, like for instance secret voting is an example of that, that we use in our government voting on something reduces secretly reduces the cost of a stating and opinion. So in a meeting, you might have a secret voting. MIT CTL & SCALE: Point rather than asking, does everybody agree.

MIT CTL & SCALE: If people can express themselves without the social cost, you’ll get a very different dynamic where people feel like well their voice matters. And it’s not just the loud guy that carries the day MIT CTL & SCALE: This particularly matters online because it is much more the case that online. The guy with a loud voice carries the day so people begin to feel alienated their opinions aren’t heard MIT CTL & SCALE: You only have infrequent interactions.

There’s no informal ways MIT CTL & SCALE: So it’s a step in that way, another is idea markets, the idea that you can post ideas and you can win brownie points or money or other sorts of things for having good ideas and people can upload them and download them. MIT CTL & SCALE: It’s not a super great way to to actually make decisions, but it’s a pretty good way to get things out there to discover stuff that’s happening to hear concerns, particularly if it’s done well, where people feel that they’re actually being listened to. MIT CTL & SCALE: There are some online tools to help these.

So for instance, you can look at all of these zoom and telephone and email paths in your organization. MIT CTL & SCALE: All these flows of ideas that you currently have, and not look necessarily at the content, but are people talking to each other. So this is a graph of an organization. MIT CTL & SCALE: That shows that some of the employees are not engaged. Some of them are really groups are very cohesive, which is fine, unless it’s physically, he said. MIT CTL & SCALE: Some things, but the communication depends on a single person who may not have an official role there the MIT CTL & SCALE: Connective tissue and usually organizations aren’t even aware when they have these sort of bottlenecks and then some groups are just not talking to each other, which is going to result in MIT CTL & SCALE: Bad things.

So my lab does spin offs in this area. So this is one that generates these sorts of data to help you manage manage silos bottlenecks isolates. MIT CTL & SCALE: And whoops, go back and their competitors. This, of course, but you might want to take a look at it. To get an idea of how you can MIT CTL & SCALE: Keep a track of the idea flow as well as the physical flow. MIT CTL & SCALE: Another thing that we’ve been able to do is have little apps on people’s phones and be able to map in real time. MIT CTL & SCALE: Where there’s crowded and where there’s risk for infection. So this is the MIT campus, you can see that there are certain places that stand out as being dangerous because they’re highly crowded. MIT CTL & SCALE: And this just happens to get cues you get jams. Everybody decides to do it at the same time.

MIT CTL & SCALE: But if you can make people aware of this, then they can take personal action to minimize their, their risk. So you can think of this, like the driving app ways people contribute data, it’s anonymous, but it lets other people and they know where there’s going to be problems. And MIT CTL & SCALE: Another sort of topic in this is managing trade offs between the infection and trust mental health and solidarity.

MIT CTL & SCALE: So these are the things that managers typically have a hard time with. We’re not taught about this. It’s usually done as sort of a skill that’s implicit or it’s considered very soft. MIT CTL & SCALE: But as I’ve tried to tell you there’s some real scientific evidence behind this. And it’s very you can make hard numbers about it, you can make hard tradeoff decisions. So you can actually manage this if you MIT CTL & SCALE: Measure it so the sort of principles are fairly clear. So, everyone should be heard and engaged and you want peer to peer networks, not necessarily top down networks.

In fact, MIT CTL & SCALE: Largely peer to peer because the peer to peer people talking to specific other people is where you get the the source of trust of mental health and of solidarity. MIT CTL & SCALE: So you need to be able to keep track of the conversations, not just that they occurred, but that there are two ways that people seem to think that they’re good. MIT CTL & SCALE: That they’re useful between peers and and take strategies to encourage that. MIT CTL & SCALE: So an example that I like is some companies have pure rewards. So people in your work group once a week, give MIT CTL & SCALE: Votes to other people in the work group and the person for doing a good job for being healthy how helpful, that sort of thing.

MIT CTL & SCALE: And the people who get the most votes get a bonus in their paycheck. Well, what that is saying is, is that the people you work with value you and it MIT CTL & SCALE: It has a sort of demonstrated power to improve trust and solidarity in the work group and other ideas flu buddies. We use buddies and camps for kids, but we need buddies here people you can turn to talk about things that aren’t part of business. Like, what do you do with the kids. MIT CTL & SCALE: How do you keep yourself clean. How do you what’s going on. You need people to really sort of share with MIT CTL & SCALE: And having specific people assigned to be helpful. So people choose their own buddies, of course, but then giving them time to sort of touch base and encourage them to do that and encourage them to post ideas that they have and be rewarded for that.

MIT CTL & SCALE: Can go a long way to maintain social support. MIT CTL & SCALE: Motivate changes by making personal risk clear, a lot of the messaging. MIT CTL & SCALE: Are stuff that misses the younger people entirely. It’s like well you know this for me, looks a lot like flu. Right. And that’s not that bad. MIT CTL & SCALE: So this business of, you know, making clear that being on a ventilator for two weeks is not good. You made I die if you’re 25 years old, but you’re really going to be in bad shape. MIT CTL & SCALE: Making those sorts of things clear, making it clear that if we can’t do this together, then we’re all going to be laid off. MIT CTL & SCALE: And being very transparent about how that happens so that people can see that it’s a rational thing, not just the boss.

Right. MIT CTL & SCALE: It is key. And you might consider things like local workspaces sounds a little problematic, but MIT CTL & SCALE: That’s a good way to build these flu buddies people that can help each other. It’s a good way to get cross organizational ties. MIT CTL & SCALE: Obviously, they have to have social distance and things, but you can have broader spaces, you can have people come in, only once in a while.

MIT CTL & SCALE: And things like we work in the suburbs, particularly is a lot cheaper per square foot than having the similar sort of distancing within a central city. MIT CTL & SCALE: So, um, other things you can do. This is another spin off of this, I call the Amazon of mental health. They offer full stack mental services. The key thing is if you take your phone. You push it and within 60 seconds you’re talking to a human.

That’s amazing. And it has huge effects on MIT CTL & SCALE: Depression social support things like that and companies like I believe Boeing has given it to all of their employees, etc. There are competitors. Of course, this one happens to be our spin out MIT CTL & SCALE: Another one is riff, which is a recent spin off. And what it does is it does that little bit of display in the middle.

MIT CTL & SCALE: Which reminds people not to dominate the conversation and it looks at who interrupts who so that you can discourage people who are sort of, you know, forcing the conversation dominating the conversation from doing that and encourage people who are MIT CTL & SCALE: Tending to be alienated and be wallflowers to be part of it. So it’s part of making everybody heard, so it’s AI for video conferences.

MIT CTL & SCALE: And then another spin off code, you know, which listen to the way people talk to each other, not the words and tries to remind people MIT CTL & SCALE: That they’re supposed to go. Hahaha, and not talk too much and so forth and call centers, use this and it has huge effects. MIT CTL & SCALE: Not only on the customers. But more importantly, perhaps these days in the employees stress and again there’s competitors. But, but that’s the spin offs that we have to look at those and sort of see more about how our group thinks about it, how I think about it. MIT CTL & SCALE: And if you’re interested in greater depth. Here’s a couple of books that talk about how people work and how social relationships work. MIT CTL & SCALE: Using real quantitative data.

It’s not a soft science. It’s actually something where you can put it in the numbers and you can crank it so without all in there. MIT CTL & SCALE: Thank you. Let’s see. I guess I’m supposed to To the Q AMP an I’ll see the Q AMP an MIT CTL & SCALE: Rental you want to help me so I can see the Q AMP.

A because it’s not coming up. MIT CTL & SCALE: Oh, there we are. Okay. MIT CTL & SCALE: So any questions, please. Start with these Words, any of these are, these are the two Elements so far. MIT CTL & SCALE: Okay, great. So now we’re working here. So the question, are we saying one on one slack communications are not as effective as water coolers.

Absolutely. MIT CTL & SCALE: Not it. Not even close. MIT CTL & SCALE: So water cooler things tend to be things that are a little more private so you can open things up. You get to see how the person feels about you see their facial expression their body language. Where’s that all goes away on Slack. MIT CTL & SCALE: So slack is good for frequency. It’s good for the sort of ease and small groups, particularly MIT CTL & SCALE: But you lose a lot and that loss has to be made up with other things. So you can’t just have slack. You have to have slack plus these other sort of reward mechanisms, you have to MIT CTL & SCALE: Manage the social graph so that everybody gets included, you should have social rewards for behavior change for building camaraderie among people and so forth. MIT CTL & SCALE: Now the question is, what are the ideas for creating informal socialization experience. MIT CTL & SCALE: I think there’s a lot of different ideas out there. MIT CTL & SCALE: You know, for us as watching movies together like Mystery Science 3000 where you do it on zoom movies on zoom.

Everybody can talk to each other. So you can make snarky comments. That’s, that’s a sort of interesting thing to do. MIT CTL & SCALE: And so you can recreate a lot of that and as a business, you should reward people for doing that you should give them tools to do that encourage them. MIT CTL & SCALE: Like I said, you can also do things that are sort of limited social things like you can MIT CTL & SCALE: Actually have local places that are very small meetings. MIT CTL & SCALE: Say in the hometown of a couple people and you know you can have a lunch meeting where you arrange that the distances are large and that’s probably okay.

Right. See, I don’t see any more questions here. Oh, there’s another one. MIT CTL & SCALE: What about small organizations so very small organizations often have a lot easier time because you can really know each other and you talk to each other. Some frequently right MIT CTL & SCALE: But you still need to do the social things you need to have one on one buddies to make sure that you know people feel good about it. MIT CTL & SCALE: Video is a lot better than text just because you can sort of see how the person is feeling and their body language and so forth.

MIT CTL & SCALE: And I think that’s MIT CTL & SCALE: That’s the main thing small organizations tend to not have a lot of bandwidth to actually Institute. These new procedures. MIT CTL & SCALE: But it’s important to actually pay attention to the mental health to the MIT CTL & SCALE: Social stuff. So for instance, in my group, I actually email all the people to ask how they’re doing because they’re all moving around the country going back home and so forth. MIT CTL & SCALE: We have a Slack channel, of course, but we also do zoom nice like we’re going to have tea today.

What is T equals tease on zoom where we all drink tea and talk about things and it sort of open open chat. MIT CTL & SCALE: Let’s see. Another question. MIT CTL & SCALE: See, what can we do as executives to keep peer to peer rewards not becoming just another popularity contest most popular plays aren’t necessarily the most productive. MIT CTL & SCALE: That hasn’t been a super problem in the places that I’ve heard it being used, but you can for instance a lot say that the peer to peer rewards have to rotate it can’t give it to the same person. MIT CTL & SCALE: Twice in a month, something like that, that makes them look a little further. I agree with you, that’s a super problem, but I think there are ways to sort of manage that.

MIT CTL & SCALE: How does a company culture of all that a virtual environment. MIT CTL & SCALE: There are some companies that had been able to do a pretty good job, um, MIT CTL & SCALE: It’s not entirely virtual, which is why I keep bringing back the sort of having little local clusters, where people actually do get together a little bit. So they know the other person’s human and so forth. They get out of their house a little MIT CTL & SCALE: Even though that’s a little more dangerous than today in the virtual if you manage that correctly, it’ll be very valuable to people. MIT CTL & SCALE: The the companies I know about that are able to do this have these mechanisms like they have group activities that have peer to peer rewards. MIT CTL & SCALE: They pay real attention to inclusiveness getting everybody to be heard and they use a lot of tools to be able to do that and their plugins to slack and things like that but zoom to do that. MIT CTL & SCALE: Let’s see, is there a way to analyze conversation dynamics, who to and so forth.

And the answer is yes. So the last company I showed Kojo does exactly that. MIT CTL & SCALE: You know, this is typically used for call center people who get in fights with the customers all the time. And what it does is it analyzes the conversation dynamics to remind the call center representative MIT CTL & SCALE: To to listen more to not interrupt to lower her tone of voice, in some cases, and it’s really quite effective. Let’s see. MIT CTL & SCALE: What would you recommend for executive communications or management communications should be a daily. Um, well. MIT CTL & SCALE: I MIT CTL & SCALE: Think that you have to be attention to cognitive overload. MIT CTL & SCALE: You need to put in a new way of operating that’s going to be a little bit experimental, you might want to focus on one thing at a time. As soon as you can get to that level of new structure so that people don’t have all got these six things and my job to do. MIT CTL & SCALE: Which is what all of us are experiencing right now.

MIT CTL & SCALE: You know, if, if you get one thing. There’s a management, then that says you know will pay for having local space, right, please, you know, suggest here. MIT CTL & SCALE: That’ll get people to sort of think about it and but you can’t have 3000 Euro. So you have to be a little bit MIT CTL & SCALE: Paste and how you do it. You have to also be somebody who is seen as trying to listen and help and as hard as it is at this point. You probably also have to MIT CTL & SCALE: Put on a little money to make some of these things happen. So people have the right equipment at home so that they can give little rewards to each other, things like that. MIT CTL & SCALE: Question. How would you address the culture that the employee isn’t working, and less than play is at work teams remote work is discounted.

Well, that, again, has to do with the engagement of people and people feeling like they’re being heard. MIT CTL & SCALE: You know, you could have check ins, like for instance in agile software development. Everybody has a track on at the beginning of the day. MIT CTL & SCALE: They say what they’re going to do. And then they go off and they do it, and then the following day, they say worked, didn’t work. So everybody spends a little bit of time. MIT CTL & SCALE: describing what are the problems. How are they going to do it, getting suggestions from others? That way you build some of the cross links to MIT CTL & SCALE: I think that that’s things like that have to happen.

Another way to do it, of course, is if you can quantify things that often helps because you can have little thermometers about how well people are doing. You have to be careful that you don’t MIT CTL & SCALE: shun people or embarrass people using things like that. So really wants to be positive. Other questions. MIT CTL & SCALE: As well covered case change people’s future social communications to rely more on it, or will it not change people’s preference. MIT CTL & SCALE: I think it’s going to change people’s preferences for sure. One can certainly see that big conferences are likely to change that idea of going into the central city will become less frequent MIT CTL & SCALE: You have more distributed organizations.

The software tools, things like Blockchain things like AI support having very distributed structures. Now you don’t all have to be there but there’s a long way to go before it feels comfortable and it really, really works. MIT CTL & SCALE: So, you know, you could look at this as an opportunity to because we’ve been talking about going virtual for 30 years MIT CTL & SCALE: It hasn’t really happened. It’s amazing that the bandwidth and the tools for doing this are existing, but the protocols, the habits, the software really isn’t up to snuff yet and I think you’re going to see a tremendous amount of experimentation in this area. MIT CTL & SCALE: So question is there evidence that video conferencing is better or worse than phone conferencing does the video help communications and the answer is absolutely. Much better. MIT CTL & SCALE: A disembodied voice, particularly if there’s more than one person on the phone.

MIT CTL & SCALE: You all know what you do you go on and do your email or write notes or something like that, because I can’t see you. If you’re actually on a video chat. They can see your expression. They can see your body language. So, if you say something and everyone goes you know MIT CTL & SCALE: That doesn’t come across on a phone, it does come across on video that’s not as good as face to face and face to face.

MIT CTL & SCALE: You get to see these little sort of interactions with people sit down here. Would you like some tea bag those sort of things are the way we use to judge each other. MIT CTL & SCALE: And really read what sort of person is this and you can do a limited amount of that on video so face to face is better. MIT CTL & SCALE: The video is getting very good for one on one things.

Some of the best things I’ve done seen have little video windows on their screen so you can see what everybody is doing. MIT CTL & SCALE: But virtual little, little fingernail things right and so you can just poke on somebody and say, Hey, Joe. MIT CTL & SCALE: Where was that thing and Joe says, something’s okay and then they go back and they’re not bothered. Again, it’s like sitting in a big circle where you can see each other and yell at each other. But it’s all virtual MIT CTL & SCALE: How do you deal with people, different cognitive and communication channels. MIT CTL & SCALE: Yes, this is a major problem.

There are so many different channels. There’s slack. There’s email. There’s video, there’s a phone. There’s a face to face physical somebody a letter. MIT CTL & SCALE: I think that none of them are MIT CTL & SCALE: There’s a richness gradient face to face video MIT CTL & SCALE: Some of the text based things that sort of slack-type things, and maybe emails, a little worse, but has other properties, you know, etc, etc. MIT CTL & SCALE: Those are better or worse. MIT CTL & SCALE: Depending on the community and the community norms, so MIT CTL & SCALE: Slack is great for a small group of people who are like doing it and want to share everything MIT CTL & SCALE: It’s, I think, fairly hopeless organization that you know where there’s 100 people on a channel or something like that. MIT CTL & SCALE: Video is really good for making people feel engaged. If you manage it correctly. MIT CTL & SCALE: You know, so, but a lot of this depends on the norms of behavior.

Everybody has to have the right sort of habits of interaction to make the tool work. The tool is only as good as the group norms will let it be. MIT CTL & SCALE: See what about giving people going through hiring process and onboarding fully remote MIT CTL & SCALE: A lot of that happens already MIT CTL & SCALE: I don’t see any good reason why I can’t continue to be going remote going virtual so you have groups of people to talk to folks who have a trial period where you work remotely.

See how that all plays out. MIT CTL & SCALE: You know, that’s going to be different. There’s going to be different norms. But if your work is virtual then the onboarding is virtual to, I guess, MIT CTL & SCALE: Um, will leaders need to reset culture was isolation is over. So I’m sure that what will happen is that the norms of behavior will change. So MIT CTL & SCALE: Things will reset to the way they were a couple weeks ago. They’ll reset somewhere between where they’re going to be in a week. And the way they were a couple weeks ago. MIT CTL & SCALE: You’re going to see a lot more virtual than you ever thought you would. MIT CTL & SCALE: Part of that has to do with real estate prices and cost of travel but you know the coven thing. It’s not clear how it’s going away. We may need to manage it continuously and if it’s not that it’s going to be another one.

MIT CTL & SCALE: So, MIT CTL & SCALE: In terms of caution, we need to be able to think about how we build structures that are not only resistant and resilient to fiscal, economic shock political shock, but also this sort of shock and we’ve been very lucky in the last MIT CTL & SCALE: long period of time that we haven’t had these sorts of shocks but historically that fairly frequent and they’re huge. Because we didn’t understand the processes. So the Black Death and the Span of so-called Spanish flu and so forth. MIT CTL & SCALE: Or they were quiet, like for instance HIV AIDS, where it didn’t disrupt MIT CTL & SCALE: Businesses because it was sexually transmitted and because it propagated fairly slowly, although completely MIT CTL & SCALE: So you know we’ve been lucky, we need to be resilient to this in the future.

So we’re not going to go back completely the way it was. Let’s see. MIT CTL & SCALE: There’s a fellow as having interesting question. I run the vessels traffic service for LA and LB, which is an organization that can’t be done remotely is akin to a 911 call MIT CTL & SCALE: Three people are watching all time and rotate desks. Any ideas well gloves disposable masks gallons. MIT CTL & SCALE: That’s what doctors do works pretty well. MIT CTL & SCALE: Wipe down things. That’s what doctors do works pretty well. MIT CTL & SCALE: The situation you have is not as bad as being in a hospital where there’s a bunch of sick people around right and you’re intentionally exposing yourself to it, but having the sort of hazmat here thinking about it, like for instance if you were in MIT CTL & SCALE: A fab plan chip fab plan, you would wear really high end fab. MIT CTL & SCALE: Gear for gloves and respirators and things like that.

I don’t think you need anything like that. MIT CTL & SCALE: Nor do you probably need the sort of thing that doctors do, but you need to have a protocol where people put on gloves like these gloves, where people MIT CTL & SCALE: Perhaps were lightweight masks not you don’t need the 2.5 Sort of supergrid things MIT CTL & SCALE: And where people have MIT CTL & SCALE: You know, a disposable coat or reusable code that they put on and wipe the surfaces down, you may have to redesign. Some of the surfaces to be wiped down MIT CTL & SCALE: Correctly, things don’t have to be disposable, the way the medical guys do it. That’s sort of crazy. MIT CTL & SCALE: But you have to, you know, at the end of your shift to have a way of to take them off and soak them in alcohol dry them and they’ll there for the next shift. So it’s, it’s sort of like people who are painters or work with hazardous material. MIT CTL & SCALE: Great.

Okay. So I guess we’re good on time here. Thank you all. I hope this was useful. And let’s do it. Keep that social support. MIT CTL & SCALE: Stop. MIT CTL & SCALE: And make good decisions all at the same time. Thank you very much. Randall Stephen Wright: So we are going to take a short break now and then we will return with Professor Angelo. And again, just a reminder to use the Q AMP. An option or function on the webinars so we can answer your questions. So we’ll see you soon. Randall Stephen Wright: Welcome back. Can the actions of central banks to limit the economic impact of the coronavirus our financial markets are predicting a global recession. Randall Stephen Wright: Professor Lowe will address the challenge of changing global economy since the outbreak of the coronavirus its impact on global financial markets and what executives need to watch for us that coronavirus crisis place up Randall Stephen Wright: Andrew low is the eternal sea and Susan T Harris professor at the MIT Sloan School of Management director of the MIT laboratory for financial engineering Randall Stephen Wright: A principal investigator at the MIT Computer Science and Artificial Intelligence Laboratory and an affiliated faculty member of the MIT Department of Electrical Engineering, Computer Science.

Randall Stephen Wright: Is also an external faculty member of the Santa Fe Institute and a research associate of the National Bureau of Economic Research Professor Andrew. Hello. MIT CTL & SCALE: Hello, everybody. Thank you very much for joining this Webinar on the financial implications of covert 19 MIT CTL & SCALE: I want to start by thanking rental right and the MIT industrial liaison program for sponsoring this webinar. MIT CTL & SCALE: And want to thank you Lucy Shafi in the center for transportation and logistics for hosting this event. MIT CTL & SCALE: And last but not least, I want to thank Arthur growl for helping to arrange all of the logistics and he’ll be in mediating some of the polls that we’re going to do today.

MIT CTL & SCALE: So by way of full disclosure, I want to say that I am no expert in epidemiology or virology, and so my focus is going to be really on trying to understand how the financial markets are reacting and how we need to be thinking about financial markets in light of the MIT CTL & SCALE: Pandemic. So with that in mind, I want to start with a bit of a summary of the perspective that I bring to this as a finance faculty member here at MIT. MIT CTL & SCALE: And that perspective really has to do with the fact that we have a very different paradigm that we need to be using right now. MIT CTL & SCALE: And that paradigm has to acknowledge the fact that traditional markets and traditional financial frameworks are really limited in how they’re approaching this particular pandemic.

MIT CTL & SCALE: The framework that we know and love is not wrong, but it’s incomplete and it really comes from the physical sciences perspective of economics. MIT CTL & SCALE: Which definitely has some value, but it really doesn’t capture the entirety of what we’re seeing. MIT CTL & SCALE: And in particular, the traditional framework is fine in a stable environment under things like the efficient market hypothesis and rational expectations. MIT CTL & SCALE: stable financial policies make perfect sense.

But in a dynamic environment, you need to have dynamic financial policies and that’s what the adaptive markets hypothesis is about. And I’ll tell you a bit about that in just a few minutes. MIT CTL & SCALE: The point is that the current environment is highly dynamic and we really have to adapt to those changing market conditions. MIT CTL & SCALE: You know how politicians are fond of saying that. It’s the economy, stupid. MIT CTL & SCALE: I’ve often thought that that should be changed to point out that actually it’s the environment that really drives behavior and the various kinds of market dynamics that we see.

MIT CTL & SCALE: And the adaptive markets framework that I’m going to tell you about provides a way for us to think about how to respond to all sorts of challenges in our environment, including coven 19 MIT CTL & SCALE: So let me start with a little bit of background and talk a bit about what investors really want and what they’re afraid of MIT CTL & SCALE: To begin with, what do investors really want. I’m going to use an example that I give to my first year MBA students and the example has to do with looking at four different financial assets. MIT CTL & SCALE: Now I’m going to ask our third to do a poll right now and ask all of you online to choose one of the four investments that I’m going to show you MIT CTL & SCALE: I’m not going to tell you what the investments are or even over what time period they span, but these are for financial investments that have rates of return that looked like this.

MIT CTL & SCALE: $1 invested in the green asset turns $1 into $2 over this unspecified multi year investment horizon. The red line turns $1 into $5 more rewarding way more risky. MIT CTL & SCALE: The blue line turns $1 into $8 way more rewarding but way more volatile and the black line somewhere in the middle. MIT CTL & SCALE: So, can you please make a choice in the poll that that Arthur’s holding, which is the various different investments which one would you pick if you can only have one and you could not mix and match. MIT CTL & SCALE: Well, just from the poll results that I’m seeing right now and for my screen, the answers are pretty clear.

Very few of you have chosen the green line. MIT CTL & SCALE: And I should tell you now what the time period is the time period goes from 1992 2008 that’s the investment horizon. MIT CTL & SCALE: And the green line is US Treasury bills the safest asset in the world, but it’s not particularly rewarding. So if you put your money in US Treasury bills in 2008 as of today, you would have earned pretty much nothing in terms of the incremental way to return. MIT CTL & SCALE: The red line that not very many of you picked either. That’s the s&p 500, the stock market was more volatile lots of ups and downs but if you had picked it in 2008 right in the middle of the financial crisis.

Congratulations, you would have done just fine. MIT CTL & SCALE: The blue line is the single pharmaceutical company Pfizer that’s even more volatile huge swings, up and down. But if you had invested in that in 2008. Congratulations, you did well. MIT CTL & SCALE: By far the most popular choice. I’m looking online right now. And the results are 66% of you are picking the black line. And that’s usually what I see in my class. MIT CTL & SCALE: It turns out that that is the return for the Fairfield Century fund and what is that that’s the fund that was the feeder fund for the Bernie Madoff Ponzi scheme.

MIT CTL & SCALE: So if you pick that like many of the unfortunate victims of that Ponzi scheme, you would have lost everything. MIT CTL & SCALE: Now I use this example to illustrate something about human nature. All of us are drawn to investments that have high yield and low volatility. MIT CTL & SCALE: And in finance, we have a term that captures that phenomenon and it has to do with something called the Sharpe ratio after William sharp fester at Stanford who won a Nobel Prize for his work in this area. MIT CTL & SCALE: The Sharpe ratio is simply the excess return of an investment above and beyond T bills, divided by the risk as measured in this case by the standard deviation MIT CTL & SCALE: So it’s the reward to risk ratio and investors love high Sharpe ratio assets.

So before the Ponzi scheme blew up if you calculate the Sharpe ratio of the three assets beyond T bills. MIT CTL & SCALE: You can see that Pfizer and the s&p 500 have Sharpe ratios, about the same. A third MIT CTL & SCALE: And the Madoff Ponzi scheme before it blew up had on paper, a Sharpe ratio about an order of magnitude higher and that’s what drew all of the victims to this unfortunate disaster. MIT CTL & SCALE: So that’s what investors want we want high yield low risk, high Sharpe ratio investments. What are investors afraid of MIT CTL & SCALE: You probably know, given what’s going on in the market.

We’re afraid of loss, but more than loss. What we’re afraid of is the unknown. And I’m going to give you another investment choice in just a minute. So be ready to respond. MIT CTL & SCALE: Imagine that we haven’t earned that contains 100 balls. Now you can’t see inside the urn. But I’ll tell you right now that there are 50 red balls and 50 black balls. MIT CTL & SCALE: And you and I were going to play a game and the game is this you’re going to pick a color red or black and after you pick a color and write it down on a piece of paper.

I’m going to reach into the urn and draw a ball out of this art. MIT CTL & SCALE: And if the color of the ball that I draw is the color you wrote on your piece of paper. I’m going to pay you $10,000 MIT CTL & SCALE: But if the color isn’t the one that I drew. I’m going to pay you nothing. And we’re going to play this game exactly once, so you don’t get to do this over and over again, just one time. MIT CTL & SCALE: So the two questions that I asked my MBA students when I show them this problem is this. First of all, which color would you prefer red or white or red or black MIT CTL & SCALE: At this point, the students all say, Well, you know, it doesn’t matter 50 read 50 black either way.

MIT CTL & SCALE: The second question that I asked them is a little bit more challenging. I’ll ask them, how much would you pay to play this game with me exactly once. So I’d like you to choose on the second pole. What would you pick in terms of the price you would pay for being able to choose this MIT CTL & SCALE: And MIT CTL & SCALE: three choices are would you pay less than $5,000 or exactly $5,000 or more than $5,000 to play this game with me exactly once. MIT CTL & SCALE: Now, I suspect that a number of you are a little bit concerned about the risk. So you probably not willing to pay $5,000 MIT CTL & SCALE: But most of the students that are involved in making professional business decisions, which is to say our MBA students. They’ve been trained to say, oh yeah, definitely will be paying $5,000 why because that’s the expected value.

MIT CTL & SCALE: And in fact, in the polls, we see that a number of you a significant fraction are willing to pay $5,000 for this. MIT CTL & SCALE: But now let me show you a second choice. MIT CTL & SCALE: second choice is earned be also 100 balls. But in this case, I’m not going to tell you what the proportion is it could be 100% black balls. It could be, it could be 100% red balls anything in between. MIT CTL & SCALE: And I’m going to ask you the same two questions. We’re going to play the exact same game you write down a color I pick a ball if it’s your color, I’ll pay you $10,000 if it’s not to pay you nothing. MIT CTL & SCALE: In this case, MIT CTL & SCALE: How many of you would pay less than 10,000 for this one.

How many of you would pay? Sorry. How many of you would pay less than $5,000 for this one? How many of you would pay exactly 5000? How many of you would pay more than 5000 for this? MIT CTL & SCALE: Well, it’s interesting. In this example, a lot fewer of you are saying that you would pay $5,000 for this. MIT CTL & SCALE: The thing that’s weird about this example is that the second example has exactly the same odds as the first one.

MIT CTL & SCALE: Now you may say, wait a minute, I Heidi. How do you know that because there are no odds. In the second example. MIT CTL & SCALE: Well, I told you that it could be 100 red balls or 100 black balls or anything in between. And if you don’t have any reason to think that it’s any one particular proportion and you average over all the possible proportions, what you get is 5050 and so the expected value of this is $5,000 MIT CTL & SCALE: But students even professional business students MIT CTL & SCALE: Are not willing to pay nearly as much for this urn as the previous one. And when you ask them why. They’ll tell you it’s because in this case, I don’t know the odds MIT CTL & SCALE: Even if I try to convince them that the odds are the same, they still say well I believe your mathematics, but it doesn’t feel right to me.

MIT CTL & SCALE: What they’re saying is that the behavioral reactions to uncertainty. The unknown unknowns is really significant investors don’t like risk, but they really hate uncertainty and in economics jargon, those two words that most people consider synonyms are actually not the same. MIT CTL & SCALE: Risk is meant to represent the randomness that you can quantify like a standard deviation of 20% MIT CTL & SCALE: Uncertainty is the kind of randomness, that you cannot quantify the so-called unknown unknowns. And that’s what’s going on right now. MIT CTL & SCALE: Is one of the biggest unknown unknowns that we’re dealing with. I’ll come back to that in a minute. MIT CTL & SCALE: But the bottom line for all of these considerations about what investors want and what they fear is that there’s a trade off between risk and reward.

MIT CTL & SCALE: And so let me show you. Historically, what that trade off looks like using data from 1928 so we’re talking about a very, very long period of time. MIT CTL & SCALE: If you go down the list and just look at all of the expected returns that are generated by these four different asset classes. MIT CTL & SCALE: And then take a look at the risks that you’re bearing, you see a pretty clear relationship, the higher the risk, the more the average return MIT CTL & SCALE: So stocks, for example, which is the most risky as measured by standard deviation SD stocks are generating return on average historically about 10% per year. MIT CTL & SCALE: corporate bonds 7% but lower volatility. MIT CTL & SCALE: US Treasury bills safest asset in the world even lower. And that’s really the risk reward trade off that finance professionals focus on MIT CTL & SCALE: Over long periods of time there is a relatively straightforward relationship between risk and reward.

Another way of putting it, is that investors. MIT CTL & SCALE: Have to be bribed to take on these risks they have to be rewarded for being willing to take on these ups and downs and so risky assets generally have to pay more in terms of their average returns MIT CTL & SCALE: Now that makes a lot of sense in the long run.

But the problem is that if you look at the short run, that’s not the case. MIT CTL & SCALE: Here’s a graph that I think illustrates that principle and in a minute. I’m going to ask you to take a poll for this as well. MIT CTL & SCALE: So there are two lines drawn here red line to blue line, the red line represents the volatility of returns over a five-year rolling windows so I’m using data from 1926 all the way up to the present. MIT CTL & SCALE: But I’m doing it using five year chunks calculating the volatility of the US stock market during that five-year window. MIT CTL & SCALE: And then I’m also going to calculate the average return of that stock market during the same five-year window and that’s in blue. So red is volatility. MIT CTL & SCALE: Blue is the average return over the five-year window, and then I’m moving it up by a day and I’m calculating the same things and then another day.

Same thing and another and another and another. And using these five-year rolling windows. I’m graphing risk and reward. MIT CTL & SCALE: By what do you think the correlation is between these two lines I just described to in the previous slide that the higher the risk, the higher the reward. MIT CTL & SCALE: So take a look at this graph and tell me how many people think that the correlation between the red line and the blue line is greater than 50% MIT CTL & SCALE: Or equal to 5025 zero negative 25 or less than negative 50% now correlation, remember, is a number between minus hundred percent plus hundred percent positive numbers mean things move together. MIT CTL & SCALE: If it’s 100% correlation things move in lockstep together and negative correlation means that things move in opposite directions.

MIT CTL & SCALE: Well, I’m seeing that from the pole. A number of you are picking up on the fact that, you know, this looks like it’s negatively correlated MIT CTL & SCALE: In fact, those of you who picked up the last choice, less than negative 50% correlation, you’re correct. It turns out that the correlation between the red line and the blue line is minus 60% now clearly that the result is driven by a number of extreme episodes.

MIT CTL & SCALE: And it turns out that we’re actually living through one such episode right now. MIT CTL & SCALE: So let me now turn to the present day and give a bit of a market recap of what’s been going on over the course of the last few weeks. MIT CTL & SCALE: I’m going to show you a graph of two qualities. One is something called the VIX index the IX and the VIX index is a forward-looking measure of volatility. MIT CTL & SCALE: To be precise, using option pricing theory. It is a formula that calculates what the market thinks the volatility is of the s&p 500 index broad based index of US stocks. MIT CTL & SCALE: It looks at what the volatility is implicit in options prices on the s&p and so historically the volatility of the s&p has been around 15 to 20% so VIX index that is pricing options at that historical volatility should read somewhere in the 15 to 20 range. MIT CTL & SCALE: Let me show you what the VIX index is from the beginning of this year, January, all the way up to last Friday.

MIT CTL & SCALE: You can see that for the first few weeks of the year the VIX index was right around that average 1015 20% MIT CTL & SCALE: But look at what’s been going on over the course of the last two or three weeks the VIX index has spiked up to some really, really high levels. MIT CTL & SCALE: Wall Street traders often call the VIX index the fear index, because when volatility is really high. People are scared. MIT CTL & SCALE: And because the VIX is a forward-looking measure. It’s a measure of what options traders are thinking the volatility is what this is saying is that the market is viewing volatility as very, very high right now. MIT CTL & SCALE: And what about the stock market. How has that been doing well? I think all of you probably know this, but let me show you what the s&p 500 index looked like over the course of the last few weeks. MIT CTL & SCALE: For the first few weeks of the year s&p was pretty much stable not moving a whole lot, but over the course of the last two or three weeks.

It’s actually been going down pretty significantly and even as we speak. The s&p are declining. MIT CTL & SCALE: As seems pretty scary. And in fact, it is scary because if you look at the top 10 worst days for the s&p from January of 1926 all the way to last Friday. This is a list of the top 10 worst days. Number one of that list is October 19, 1987 in one day. The s&p dropped by about 20% MIT CTL & SCALE: But if you go down that list, you see that last Thursday the s&p went down nine and a half percent that’s number five on this top 10 list. So yeah, things are scary markets are moving a lot MIT CTL & SCALE: That’s not the only market that’s reacting MIT CTL & SCALE: If you take a look at US Treasury securities, as I said, among the safest assets in the world, you can actually look into them to try to understand what the market is thinking about economic prospects. MIT CTL & SCALE: So this is the so-called yield curve which shows you what US Treasury securities are yielding MIT CTL & SCALE: Across the various different maturities now these are pieces of paper that are IO us from the US government when we buy them we’re lending.

The US government money. MIT CTL & SCALE: And the government is paying us interest and based upon what the market will bear that interest will change across various different market conditions. MIT CTL & SCALE: Now here’s a curve from January, the second of this year that shows for one month treasury bills, you’re going to get about one and a half percent per year on average. MIT CTL & SCALE: As you get into longer maturity treasury bills Treasury notes and bonds that interest rate goes up.

MIT CTL & SCALE: So on January, the second of this year, if you’re willing to lend the US government for 30 year period, you will get paid almost two and a half percent a year instead of one and a half. MIT CTL & SCALE: Typically when we loan money to other counter parties for a longer period of time. We’re going to actually be getting paid higher interest because MIT CTL & SCALE: Well, when you’re loaning money for a longer horizon more things can happen. There’s more risk over that longer horizon and so you’re going to get rewarded for that, risk, risk-reward trade off as we saw before. MIT CTL & SCALE: But on occasion. This upward sloping yield curve can shift. MIT CTL & SCALE: And let me show you what this yield curve look like just a few weeks later on February the 18th MIT CTL & SCALE: So now at the short end of the yield curve meaning for shorter maturity bonds, you’re getting about the same yield.

MIT CTL & SCALE: But as you go into longer maturities actually the yield has declined so contrary to what I just told you about longer maturity. MIT CTL & SCALE: Loans getting a higher yield. In this case, we have what’s known as an inverted yield curve. MIT CTL & SCALE: There are periods of longer horizons, where the yields are actually lower and that’s telling us something. It’s telling us that people who buy these bonds. MIT CTL & SCALE: Are thinking that we may be heading towards a recession that interest rates are going to be going down farther into the future.

MIT CTL & SCALE: And as a result, we’re going to see these inversions. Now, it’s not a perfect forecast. But over the course of the last several decades. When you have inverted yield curves. More often than not, you have had recessions, one, two, and three years later. So this is a source of concern. MIT CTL & SCALE: But if you look later on in the year at the yield curves, you see something else happening still an inversion and even deeper dip. MIT CTL & SCALE: But then over the course of just the last week, you see that the shorter than the yield curve has dropped dramatically, what’s going on there. Is that the Fed has been cutting rates, trying to stimulate the economy. MIT CTL & SCALE: The Fed has also been reflecting on the fact that more and more people are now wanting to buy shorter-term US Treasury securities. MIT CTL & SCALE: Typically when you buy the securities you bit up their price that actually lowers their yield. So, as the yields get lower and lower. MIT CTL & SCALE: What that’s telling you is that there’s more and more demand for shorter-term securities for the US government.

And that’s a consequence of people putting more money into that presumably taking it out of riskier assets. MIT CTL & SCALE: As the yields go down, you’re seeing what’s called a flight to quality or flight to safety. MIT CTL & SCALE: So these markets are telling us that something serious is going on and that financial market participants are reacting MIT CTL & SCALE: Yet another illustration of the fact that we’re going to a flight to quality flight to safety. MIT CTL & SCALE: Is the difference in yield between corporate bonds which have the risk that companies can go bankrupt. So the bonds can default versus US Treasury securities. MIT CTL & SCALE: This is a graph that shows the spread between be double corporate bonds that are investment grade and those that are treasury bills.

MIT CTL & SCALE: And you can see that over the course of the last few weeks, we’ve gone from about a two percentage point spread between US Treasury securities and corporate bonds to a spread of 3.2% that’s quite a big difference. Just in the course of a couple of weeks. MIT CTL & SCALE: So, to put it bluntly, people are freaking out. They’re putting money into safer assets from more risky assets. MIT CTL & SCALE: Now if we go back in time and look at the financial crisis, we actually see some similarities. So let me show you the yield curve that occurred on January, the second 2007 that yield curve, much higher in those days, but nevertheless you still see an inversion at the beginning of 2007 MIT CTL & SCALE: Now, it turns out that the economy was going into a recession at that time. And clearly, this inversion showed that MIT CTL & SCALE: But if you look at the course of the yield curves during that fateful year 2007 2008 what you’ll see is progressively lower and lower yields at the short end and in January.

Second of MIT CTL & SCALE: Yield Curve actually show that in the very short end you’re actually at zero. In fact, there was a brief period of time. MIT CTL & SCALE: Where the yield dipped below zero. A negative yield for US Treasury securities. That’s a pretty shocking state of affairs, because what that saying is the effect I an investor and willing to pay $1,001 today. MIT CTL & SCALE: In order to get back from you $1,000 three months from now, why would I pay more money today in order to get back less three months from now.

MIT CTL & SCALE: It’s because I’m really worried that I’m not going to be able to get my money back. And so I want the safety of US government securities. MIT CTL & SCALE: So we’re not there yet, but I suspect that there’s a chance that over the course of the next few weeks or months, we may get to a zero interest rate and possibly negative yield environment because of the market reaction. MIT CTL & SCALE: So, MIT CTL & SCALE: Let me give you a bit of perspective now having described the current state of affairs.

MIT CTL & SCALE: First of all, in terms of where we are now. Let’s keep in mind where we came from. So I’m going to show you the same fear index and the SMP 500 but not just year to date. I want to go back to 2016 MIT CTL & SCALE: And when you look at the fear index, you see that there are a number of periods over that multi-year horizon, where the fear index has shot up maybe not as high as it is today.

MIT CTL & SCALE: But a little bit later on I’ll show you where there are periods where it’s gotten even higher. But more importantly, let me show you what happened to the s&p 500 during that period of time. MIT CTL & SCALE: We’ve had a pretty significant drop over the course of the last couple of weeks in the s&p but remember where we came from. In January of 2019 the s&p was that about 2500 and over the course of MIT CTL & SCALE: The s&p went up by about 36% so we may have lost a lot of those games, we may have lost all of it. But if the SMP is not zero. MIT CTL & SCALE: We’ve lost the gains from over the past year, but many of you have argued that over that past year those games were really way too high and not sustainable.

And so the market is correcting as it does from time to time. MIT CTL & SCALE: Now you’ll notice that there’s a little bit of a wiggle back in 2008 sorry MIT CTL & SCALE: And this wiggle is something that doesn’t look like a whole lot compared to where we are. But at the time, the newspapers made a big deal of it at that particular date, which was February, the fifth of MIT CTL & SCALE: Turns out that the Dow went down by 1100 and 75 points, the worst point decline in history. That sounds really scary. MIT CTL & SCALE: Until you realize that the reason that it’s the worst point decline is because the Dow Jones index is at a very high level. And so when you translate into a rate of return. MIT CTL & SCALE: That decline was about four and a half percent, which in the grand scheme of things, is not that big a deal. It is large, but it’s not outrageously large, it certainly can happen from time to time. MIT CTL & SCALE: And so newspapers will fix on really shocking news whatever way that they can put it MIT CTL & SCALE: And that’s part of what’s going on right now people are being scared because these numbers are breaking certain records like the Dow Jones back in February of 2018 but the fact is that markets do go up and down there is risk and markets will recover.

MIT CTL & SCALE: Let me give you a bit more perspective and focus on it’s true that the fact that that last Thursday was a pretty bad day. We lost nine and a half percent in the s&p in one day. MIT CTL & SCALE: And it is true that the VIX index was among the worst. If you rank the VIX index, since it began in 1990 then Thursday was probably MIT CTL & SCALE: In the top five. And in fact here shows the top four in terms of how high the VIX was so naturally you might think, well, we should be getting out and in some cases for certain individuals, it makes sense to get out.

The question is, do you know when to get back in MIT CTL & SCALE: Because the markets do recover and unless you’re watching them like a hawk. And it’s very hard to do that unless you’re a financial market professional with all of these various tools. MIT CTL & SCALE: You may not know when to get back in. So let me illustrate to you that with what happened last Friday. If you take a look at the top 10 best days of the s&p from 1926 to march. 13 of MIT CTL & SCALE: Here are the top 10 best days. MIT CTL & SCALE: And it turns out that last Friday the 13th ranked number seven in the very best days of the s&p MIT CTL & SCALE: I’m not sure if any of you have read The Tale of Two Cities. It was the best of times, it was the worst of times. That’s kind of sort of what we’re living through right now.

MIT CTL & SCALE: Markets are very volatile and unless you actually know how to time them. It is very difficult to pick the times when you should get out and the times when you should get back in MIT CTL & SCALE: In fact, we know that they’re going to be winners and losers. Many of them having to do with new technologies versus traditional technologies. MIT CTL & SCALE: Let me give you a couple of examples cruise ships like Carnival Cruise Lines have been hit pretty hard. MIT CTL & SCALE: Not surprisingly, if you look at the stock price of carnival.

Carnival Cruise Lines, one of the largest cruise lines in the world at the beginning of this year, they were trading at about $50 and 72 cents as a Friday Carnival Cruise Line was trading at $17 and 58 cents. MIT CTL & SCALE: They’re obviously one of the losers in this current situation, how about one of the winners. Well, zoom video MIT CTL & SCALE: We’re coming to you through zoom technology right now beginning of the year. Zoom video was that $68 and 72 cents as a Friday $107 and 47 cents. So what’s happening is market dislocation because of concerns about MIT CTL & SCALE: And there are tremendous opportunities opportunities being created right now for active managers. So if you’re an active manager. Congratulations, you’re in a period of time where you will be able to make your name in this business by identifying the winners and losers and trading quarterly MIT CTL & SCALE: But what about for the rest of us for the rest of us it’s about diversification, making sure that you’ve got your best spread across a number of different assets.

MIT CTL & SCALE: And about dealing with your own emotions and how to react to these market gyrations I’ll get to that in a few minutes. Now it’s often helpful in thinking about what we ought to do to compare across time at other scenarios that may be similar to what we’re going through now. MIT CTL & SCALE: Now it’s often said that history doesn’t repeat itself, but it often rhymes been attributed to Mark Twain, but nobody can seem to find a definitive point where he actually said it in any case.

MIT CTL & SCALE: The truth of it is really what I want to focus on thinking about the past doesn’t always tell us exactly what’s going to happen, but it can give us ways of MIT CTL & SCALE: At least providing guidance and how we react so I want to compare what we’re going through to two particular scenarios. The 1918 influenza pandemic or so called Spanish flu. I’ll tell you in a minute why that’s in quotes. And then second, the 2008 financial crisis. MIT CTL & SCALE: Now before you get frustrated about this comparison because I’m going to tell you right now that the comparison is not perfect. There are all sorts of reasons why the current situation that we’re going through is not like the MIT CTL & SCALE: Pandemic or the 2008 financial crisis, but these are the closest things that match where we may be going through over the course of the next few weeks.

So that’s why I want to spend a few minutes talking about them. MIT CTL & SCALE: So let’s start with the 1980s influence and pandemic, first of all, there’s been some research done on the economic consequences of that pandemic. MIT CTL & SCALE: And the research paper that I want to point you to is an article that came out from the Federal Reserve Bank of St. Louis. In November of 2007 by Thomas Garret now there’s not a lot of economic data from MIT CTL & SCALE: So this article couldn’t say a whole lot about what was going on.

But it’s kind of instructive in terms of what they are able to cover MIT CTL & SCALE: And I’ll tell you a bit about that in a minute. The first point I want to make is that the reason that we don’t call it the Spanish flu any longer is because it turns out that it really was not from Spain. MIT CTL & SCALE: We’re not exactly sure where the flu came from, but the reason that people call it the Spanish flu is that MIT CTL & SCALE: Was during world war one and the countries that were the infections taking hold initially were under a news blackout and they did not want to publicize MIT CTL & SCALE: The influenza, because they didn’t want people to panic. They wanted to maintain morale and Spain was neutral time so they didn’t have a news blackout. So the first reports that people read about the flu came from Spain, hence the term Spanish flu.

MIT CTL & SCALE: So, MIT CTL & SCALE: This article summarizes the economic consequences of the influenza and there are three conclusions that I’ll talk about a few minutes. MIT CTL & SCALE: The first is that most of the economic effects of the influenza were pretty short term. Now we have to acknowledge that the human consequences were tremendous MIT CTL & SCALE: A large number of people anywhere from 20,000,002 50 million. I’ve heard figures as high as 100 million died as a because of that pandemic. So I don’t want to minimize that tremendous human tragedy.

MIT CTL & SCALE: But from the business perspective. What we found is that businesses that were involved in services and entertainment. They were affected pretty severely they lost MIT CTL & SCALE: But other businesses, for example those specializing in healthcare they actually did much better. MIT CTL & SCALE: So it’s a mixed bag and as long as you are well diversified over that period of time, even though there were short term losses. Eventually it recovered. MIT CTL & SCALE: Second, there was some shortage of labor, obviously, because a number of people were stricken with this pandemic and that actually resulted in wage inflation.

MIT CTL & SCALE: So certain areas that were hit hardest had the fewest number of people that were able to work. Those are the areas that experienced the greatest wage inflation. MIT CTL & SCALE: And finally, there was some evidence that women that were pregnant with children during that period of time, those children suffered afterwards for a variety of reasons, and you can read about it in the paper and what cited there. MIT CTL & SCALE: But what I want to talk about is the stock market experience during that period of time. Now I said we don’t have a lot of data going back that period that far but MIT CTL & SCALE: There is a stock market index that bill short a finance professor at the University of Rochester created MIT CTL & SCALE: And that index goes from the 1800s, all the way to the present.

It’s the Dow Jones composite index from the 1800s, up to around 1928 MIT CTL & SCALE: And for our purposes. That works just fine. So I’m going to show you that Dow Jones composite index from MIT CTL & SCALE: 1916 all the way to 1922 so that really captures the period before, during and after the 1918 pandemic. MIT CTL & SCALE: Now there are a few dates that I’ve drawn on this graph, April 2, 1917 that’s when the United States declared war on Germany, when we entered World War One. MIT CTL & SCALE: At the time there is about 120 7000 members of the US Army that were involved. By the time we ended the war in 1919 MIT CTL & SCALE: Over 4 million Americans ended up serving in the war and another 800,000 in other branches of the military. MIT CTL & SCALE: So a lot of people were involved. They were traveling around the world. And as you can imagine that did a lot to spread the flu. MIT CTL & SCALE: So here’s a chart of what happened during that period of time.

And you can see that from the time that war was declared until April 5, 1918. That was the first news story of MIT CTL & SCALE: Some kind of infection here in the United States. It came from a military base in Kansas, the stock market went down, but I wouldn’t call it a crash it did go down. MIT CTL & SCALE: Probably about 20% so that’s fairly significant, but it recovered and so net net over the course of a year down 10% market fluctuations certainly can do that.

MIT CTL & SCALE: The the the pandemic of is divided into three different periods. The first period starting around March of 1918, going through the summer. That was the first wave MIT CTL & SCALE: But the second and third waves were much more serious. The second wave occurred between September and December. MIT CTL & SCALE: And during that second period, which is the most deadly we lost a tremendous number of lives in the month of October alone, we lost 190 5000 people in the United States. MIT CTL & SCALE: 190 5000 they give you some perspective, the H1 and one pandemics of 2009 the total number of deaths estimated in the US from 2009 to 2018 is about 75,000 MIT CTL & SCALE: The 1918 pandemic killed 670 5000 when all was said and done, and so that third wave that took us all the way to June of 2019 also killed several hundred thousand lives.

MIT CTL & SCALE: Throughout this terrible period when we see that not are enormous, loss of life tremendous danger to society. MIT CTL & SCALE: What happened to the stock market. MIT CTL & SCALE: It went up. MIT CTL & SCALE: Now, I know it may sound obscene to be talking about business in the context of this great human tragedy. MIT CTL & SCALE: But the point I’m making is that while tragic from an investment point of view, there’s a very different market dynamic MIT CTL & SCALE: Now you can’t compare exactly because, of course, that was the end of the war, there are other things going on the US economy. MIT CTL & SCALE: There’s some very big differences between back then. And today, but as close as we can tell, it is clear that even in something as devastating as the 1980s influence a pandemic, even in that case the economy recovered and went on to do really well after that.

MIT CTL & SCALE: So we’re running short on time. So I’m going to skip ahead and go to the point about the financial crisis of 2008 MIT CTL & SCALE: And in this particular case, we can see that there are some very clear parallels. MIT CTL & SCALE: With the exception that the real economy got hit very hard. Many, many millions of jobs were lost and it was incredibly disruptive because the entire financial system looked like it was on the brink of collapse. MIT CTL & SCALE: Although that may have been overblown, but certainly from a financial perspective, it didn’t seem that way. MIT CTL & SCALE: So when you look at the fear index back to 2008, you can see that, while the VIX index is high.

Now it was even higher during 2008 and it stayed high for a period of time. And there are a number of difficult challenges. MIT CTL & SCALE: Also the SMP 500 went down. It looks like it didn’t go down as significantly. But if you look at it on a log scale were on a log scale, the same vertical distances correspond to the same rates of return. MIT CTL & SCALE: On a return basis, it was much worse. Back in 2008 now. We’re not done. And so there may be some difficulties going on that. MIT CTL & SCALE: Remains to be seen. But we look at credit spreads way higher in 2008 and the amount of intervention that was undertaken was unprecedented MIT CTL & SCALE: Initial bailout pant plan was rejected in September of 2008 it was ultimately approved in October, we’re talking about something like $700 billion of intervention.

MIT CTL & SCALE: And there are many different programs that were undertaken in order to deal with that kind of a crisis, lots of things happen over a very short period of time. MIT CTL & SCALE: And it was really that that kind of spending that ultimately, much of which has been repaid that spending that ultimately ended up MIT CTL & SCALE: Changing the dynamic, to the point where we did not have the same kind of depression that we experienced in the aftermath of the 1929 market crash. MIT CTL & SCALE: Why did we do all of this, we did all of this because we wanted to prevent madness of mobs. We wanted to prevent people from engaging in this kind of crazy. MIT CTL & SCALE: Behavior of letting your emotions run wild and making a run. We’ve seen that kind of herd mentality before in animals.

Obviously, it happens. And there are many good reasons why it can happen. MIT CTL & SCALE: But when you think about the Salem witch trials or bank run those are examples with that kind of herd mentality does not help. MIT CTL & SCALE: We see this right now we’re going through this with hand sanitizer. If you’re trying to get that hand sanitizer. Good luck. There’s been a run on that and some other things. MIT CTL & SCALE: And in these cases, we need to think a little bit more rationally and try to understand that in the short run, there will be dislocation. MIT CTL & SCALE: Even if it turns out that these methods aren’t necessarily helping the case of hand sanitizer, although we all agree that hygiene is important.

MIT CTL & SCALE: The FDA is actually put out a clear statement that using hand sanitizer does not necessarily reduce your chances of getting a virus. MIT CTL & SCALE: And so while it’s good practice to use hand sanitizers and wash your hands. That’s not enough. We have to engage in additional measures like social distancing and so on. MIT CTL & SCALE: So our response to covert 19 so far, what have we done relative to the financial crisis. Well, we’ve passed spending bill. MIT CTL & SCALE: How much is that spending bill $8.3 billion. That’s a good start, but that’s not enough.

MIT CTL & SCALE: And part of the reason that markets are reacting the way they are, is because the response so far has not provided a credible set of MIT CTL & SCALE: measures that will deal with this crisis in a way that will deal with it once and for all. MIT CTL & SCALE: Now, unlike the financial crisis, just throwing money at this problem isn’t going to be enough, because dealing with viruses require time scientific and medical expertise. MIT CTL & SCALE: Once you decide that you want to develop a vaccine. It is often several years before you get one. MIT CTL & SCALE: We need sustained resources to prepare for the outbreaks. And right now, this area does not have the resources it needs. MIT CTL & SCALE: Now there are organizations like the Kovac a coalition for epidemic preparedness initiatives, the World Health Organization gates that are helping, but we need more MIT CTL & SCALE: So the takeaways are you have to think about the situation from the short, medium and long term perspectives.

MIT CTL & SCALE: Things will probably get worse before they get better, both from the perspective of this particular outbreak, but also financially. MIT CTL & SCALE: The short run is going to be lots of ups and downs and a one size fits all solution is just not going to work. We’re going to have to think in terms of MIT CTL & SCALE: Who you are and what horizon.

You’re looking at in the short run. If you need cash and you need to be able to MIT CTL & SCALE: PUT MONEY TO WORK YOU NEED. You will need to preserve your capital, but in the medium and longer run there is going to be a recovery. So you need to examine your goals, your particular constraints and resources. MIT CTL & SCALE: And do not panic. Do not freak out, manage your fears. Be aware of the fact that the madness of mobs is causing these great swings. MIT CTL & SCALE: And you’ll need to use all of the tools that are at your disposal. If you’re not equipped to do that. You may need to seek financial advice from a fiduciary somebody who’s looking out for your interest. MIT CTL & SCALE: So since we’re just about out of time.

I’m going to stop there. These slides will be available to all of you. Afterwards, I would ask you all to please stay safe and to MIT CTL & SCALE: Be considered. Think about how to deal with this problem in a way that is going to be productive social distancing seems to be the most effective way now and I wish you all well and happy to take questions now. MIT CTL & SCALE: So one of the questions that I’ve gotten is that the. How do you ensure that stimulus goes to good use throughout the economy and not just to do buybacks MIT CTL & SCALE: It is true that if we end up getting into a situation where we start engaging in fiscal stimulus that means the government spending money. MIT CTL & SCALE: We want to make sure that that money is actually creating resilience in the economy. MIT CTL & SCALE: One way to do that is to think about what kinds of investments we make today can turn into jobs tomorrow.

So education is a very important component MIT CTL & SCALE: But right now, I would say investing in the infrastructure needed to produce vaccines on a massive scale investing in MIT CTL & SCALE: ventilators, which is something that we’re going to need. Once the flu gets going in a much more serious way in this country. That’s something that we can be investing in MIT CTL & SCALE: So while the $8.3 billion is a good start. We need many more billions of dollars, as we’ve seen from the financial crisis, once you start dealing with the situation in a way that gives MIT CTL & SCALE: Investors’ confidence. Once you are able to restore trust and confidence at that point you can start turning things around. MIT CTL & SCALE: Thank you very much. Good to be with you.

Randall Stephen Wright: Consume the crew. Crew Corona virus, and we hope you all keep safe and well. And thank you for joining us..