Using History to Make Sense of the Impact of Brexit on Markets

24 06 2016

I am still trying to process the impact of the Brexit vote.

 

 

In this video, Gillian Tett and John Authers of the Financial Times discuss the possible results of Brexit for markets. The video is well worth watching in its entirety. As someone who studies how firms make use of the past, I was particularly interested in the first minute or so, where the speakers are using historical analogy to make sense of what is likely to happen to markets in the next few days. Gillian Tett poses the question: “What are we facing here, is this LTCM or is this another Lehman Brothers?” Gillian then explains the historical references by pointing out the failure of Long-Term Capital Management caused a brief plunge in the market that was followed by recovery and a return to normal, while the collapse of Lehman Brothers initiated a chain reaction and an impact that is still being felt nearly a decade later. Tett cautiously says it is too soon to tell whether Brexit will be a LTCM or Lehman Brothers.  Tett argues that increased capital ratios imposed on TBTF banks in recent years means that financial institutions are in a better position to survive a TBTF-style crisis than they were before the GFC.

It occurs to me that my fellow management academics should do more research on how people in finance use history for sensemaking and sensegiving. Natalya Vinokurova of the Wharton School is doing important research in this area but we need much more of it.

 

 

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