5.

Apply now the Ten Archetypes of Systems-Thinking (see also Chapter 2) that study any market
phenomenon. Explain each Archetype and its potential for explaining and predicting, past or
expected structures of market behavior of the same phenomenon under investigation. Illustrate
the application of each Archetype by past, current or projected examples.
Human behavior is a complex phenomenon that follows a pattern, and the laws of system
thinking could explain this pattern. But the complex human behavior is characterized by "structures",
which tend to form interrelationships among components in a system. Archetypes are the generic
systemic structures that are found in organizations throughout the hierarchy. System archetypes are the
repetitive patterns, which is used as tool to analyze the past trends and formulate current ideas and plans.
The tools built using system archetypes consider the failures that have occurred in the past and seen to
it that reinforcing processes and undertaken to achieve the result. There are ten system archetypes which
we would discuss and relate those with Lehman brothers and the 2008 Financial Crisis.

Archetype 1: Limits to Growth

Every organization has a growth cycle wherein initially it grows at a higher pace as it
is in its nascent stages and the scope of expansion is very high, but after the period of growth,
inevitably comes a stage where is a stagnation of growth even though huge efforts are put in to
avoid it. This process can be attributed to Limits to Growth, which is not only applicable to
organizations but also at an individual level as well.

The downfall of Lehman Brothers and the eventual global crisis could be attributed to
Limits to Growth. During the housing boom in the early 2000s, Lehman Brothers and many
other financial firms branched into Mortgage-backed securities and other collateral debt
obligations, and it also acquired five mortgage lenders, which included a sub-prime lender.
These acquisitions were fruitful in the beginning as revenues from the company's real estate
business grew over 55% from 2004-2006, profits kept increasing till 2007. But in the first
quarter of 2007, there were early signs of downfall as the stock of Lehman fell considerably
due to defaulters of sub-prime mortgages. In the next year and a half, investment banks that
were involved with sub-prime mortgages went in a downward spiral, eventually leading to the
closure of many investment banks.

Archetype 2: Shifting the Burden

This archetype deals with symptoms rather than the original problem. When a problem
arises, naturally, some symptoms come up, and while addressing these symptoms and solving
them would have an immediate improvement, but the original problem remains unaddressed.
This is shifting the burden from addressing a severe challenge to working on a solution that
gives a short-term benefit.

In 2007, there were initial symptoms of bubble burst when the number of defaulters
was increasing, and the stock of Lehman went downwards. Instead of analyzing the big picture
and making prudent decisions about lending, Lehman underwrote more mortgage-backed
securities. There was a considerable increase in the stock price after this move, but Lehman
failed to address the issue of rising defaulters' rate, which ultimately lead to their downfall.

Archetype 3: “Fixes that Backfire”

This archetype states the implications of short-term fixes to a current problem in the
long run. These short-term fixes could be useful but, consistently addressing the issues in the
short-term perspective would have a snowball effect on the situation. In due course, the
temporary repairs could have a detrimental impact on the situation.

Lehman Brothers, in order to deal with a dip in the stock price, in the first quarter of 2007
underwrote more mortgage-backed securities. It worked temporarily as the stock price rose,
but the company failed to trim its large mortgage portfolio, which would have had losses at
that time would have been the apt measure then to save the company.

Archetype 4: “Tragedy of the Commons”

People are often excited about a new resource/ technology etc. when it enters the
market, and people tend to use those resources more than they require or afford. Gradually
more people are interested in the resource and start enjoying the fruits of it. Eventually, the
resource would become too depleted to handle the demand from a high number of people and
groups, and the benefits from it would be decreased proportionally for each one of them. This
phenomenon is called the tragedy of commons.

The period of 2002-2007 was a typical example of an unsustainable boom as there was
a tremendous increase in different forms of finance that fed the boom in the US and other
advanced economies. This increase in credit flow pushed down the cost of capital. More and
more people started investing in the resources which were growing at a high pace but
underestimated the risk attached to it.

Archetype 5: “Accidental Adversaries”

This archetype explains how two groups who would gain potential benefit from
supporting each other end up competing against each other. The reason for this might be
because two parties are unwilling to compromise on their hold in the market and fear the
possibility of losing the share in the market while being in the partnership.

Archetype 6: “Success to the Successful”

This archetype states that between the two competing systems, there would be one
system that keeps getting improved consistently, and the other keeps going down and down.
Due to the initial success of a system, it is given more preference (availability bias), and the
less successful system is neglected and not given a chance to improve itself, which eventually
leads to the depletion of that system.

Following the burst of the dotcom bubble, the interest rates in the US became low due
to which people started borrowing more money from the banks. Banks were willing to lend
money to sub-prime lenders as well, and people began betting more on this industry, which
seemed successful at that time.

Archetype 7: “Balancing Process with Delay”

This archetype states that taking aggressive measures to correct system that is growing
at a slow pace can end up making the system more unstable. In this situation, it is pertinent to
thoroughly analyse the reason before taking the corrective action. This can be achieved through
taking the delayed feedback of the process and modify future actions
During the period before the crisis, mortgage lenders kept on lending money to people
without performing a thorough background verification and. This had a serious implication
when the market exploded, and borrowers refused to pay the mortgage and vacated their
property.

Archetype 8: “Growth and Underinvestment”

Growth and Underinvestment archetype describes the firm's investment in its resources
and capabilities for the growth. This action will, in turn, stimulate the demand while the
performance of the firm would be limited to its growth. On the contrary, if the firm’s current
performance is affecting the demand, no amount of company’s initiatives for growth would
attract customers to invest in.

Archetype 9: “Escalation”

In any market, two competing organizations feel threatened about their position when
the other one is progressing. This competition will force the organization to adopt a more
aggressive approach often without having complete due diligence. This cycle culminates in
either of the organizations taking an approach which they never intend to do in the first place.
Therefore, this archetype elaborates on the organizations adapting approach, which would gain
them a relative advantage over others.

Archetype 10: “Eroding Goals”

This archetype states that it is essential to stick onto the vision even though there are short-
term gains visible due to improved performance. It is important to make sure that we are
completely equipped with resources before we make decisions to expand or increase
productivity. This is important because in case we are unsuccessful in our attempt, the
stakeholders involved would be affected and might lose trust in us.

As the borrowings of Lehman Brothers were increasing, it was facing a liquidity crisis,
so it was borrowing millions of dollars in the funding markets. Therefore, its long-term assets
were being funded by short-term debts. In early 2008 when the word of Lehman going under
the roof was doing rumors, many investors withdrew their money from the bank, which made
Lehman even more vulnerable, leading to its downfall after the burst.

References

1. https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp
2. https://www.albany.edu/faculty/gpr/PAD724/724WebArticles/sys_archetypes.pdf
3. Wiggins, Rosalind Z.; Piontek, Thomas; and Metrick, Andrew (2019) "The Lehman Brothers Bankruptcy A:
Overview," Journal of Financial Crises: Vol. 1 : Iss. 1, 39-62.
Available at: https://elischolar.library.yale.edu/journal-of-financial-crises/vol1/iss1/2