In the aftermath of Hurricane Katrina, former General Electric CEO Jack Welch wrote an op-ed in The Wall Street Journal that elucidated the five stages of crisis management: denial, containment, shame-mongering, blood on the floor and, finally, the crisis gets fixed.
He was able to draw upon his experience in managing a crisis in a big business as a means for understanding our collective response to Katrina. Of course trying to make sense of this tragedy does not bring back those who lost their lives, but the process is intended to help us better respond to subsequent crises.
So too with a financial crisis – it is terrible to keep reliving the pain from a bad time in your life, but it is important to understand what got you there so that you can hopefully avoid ever repeating it.
As I sat with a couple in the week following Katrina, I found that the five stages of crisis management could also be applied to a personal financial crisis.
Dr. and Mrs. Frozen Finances (the “FF’s”) had suffered a significant setback in their financial lives and needed a plan to move forward. At the top of the stock market bubble in early 2000, they were flying high – their combined retirement accounts were worth $1.5 million (when I met them, the value was halved to $750,000).
While they worked with a stock broker, the FF’s were essentially making investment decisions themselves. Like most, they were seduced by technology stocks and yet as the NASDAQ fell throughout 2000 and into 2001, they were convinced that everything would come back – in other words, they were in denial of the reality that faced them.
As the year progressed, they thought that they could monitor the situation, trade around their losing positions and ultimately contain the losses.
As Welch notes, containment can also include “buck-passing” where the parties assign responsibility to others in hopes of making it go away, before they enter the third phase – shame-mongering, where the parties involved become defensive and assign blame to everyone but themselves. In this case, the Frozen Finances became convinced that the account losses were the broker’s fault, but did not fire him nor did they move their accounts from his firm.
Time passed and the FF’s recovered some of their losses, but not enough to satisfy them.
And so when they came to see me, it was time for the fourth phase, blood on the floor – the point at which someone pays. In this case, it was the broker who they had recently fired. But that’s where they were stuck – they could not move into the fifth and final phase, the crisis gets fixed because they just did not know how to fix the crisis.
And thank goodness they realized that fact, because without doing so, they would be unable to rebuild their financial levees. Welch observes that “crises reveal how and where the system is broken in ways that make denial no longer feasible. They have a way of forcing real solutions to happen.”
For people who face financial crises, whether a business failure, a personal bankruptcy or an investment washout, it is imperative to learn from the event and break the cycle of the crisis.
Indeed the FF’s were able to see that only by breaking through to the fixing stage could they ever hope to achieve their various goals and avoid the financial flood that had previously engulfed them.
Jill Schlesinger, CFP, is chief investment officer and co-owner of StrategicPoint Investment Advisors.
