Concept
Calm plants the seeds of crazy
Calm plants the seeds of crazy is Morgan Housel's phrase in Same as Ever for the pattern in which long stability makes people comfortable with more risk, and the debt and commitments they add during the calm are what turn the next ordinary downturn into a crisis.
Housel builds on an argument associated with the economist Hyman Minsky: when an economy has been calm for long enough, lenders and borrowers grow confident that it will stay calm, so they borrow more, lend on easier terms and keep thinner cushions, and those choices make the system fragile. The same mechanism works inside a company or a household. After several strong years, a plan that assumes another one feels prudent, fixed costs rise to the new normal, and nothing seems reckless because every recent piece of evidence supports it. When a normal bad year arrives, it meets a structure with no slack. The point is not to distrust good times but to recognise that our reading of risk follows recent experience, which is most reassuring just before it changes. The practical answer is to write the rules for good years, such as a ceiling on fixed costs, while the years are good.
A real-life example
A chain of private dental clinics in Ankara opened three branches in one year after four years of steady growth, each on a long lease and a bank loan. When patient numbers dipped for a season, the dip itself was ordinary; the combined repayments were not. The owners now cap fixed costs at what the chain could carry through a year of revenue a third lower.
How to use it
- 1In a good year, list every commitment that only makes sense if the good years continue.
- 2Set a ceiling on fixed costs you could still carry through a year of falling revenue.
- 3Treat the feeling that a bold plan is prudent, after several good years, as a reason to check.