Two-Effect Crisis Analysis
Predict lasting change by separating accelerated trends from new reactions
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 5
- Confidence
- 96%
Begin by defining the shock and the systems it has disrupted. Then divide possible lasting effects into two groups: trends already visible before the crisis that are now accelerating, and social or political reactions created by the crisis itself. Evaluate the first group using pre-crisis evidence, adoption rates, and structural incentives. Evaluate the second through policy responses, public attitudes, and institutional behavior. Finally, translate both groups into implications for strategy, investment, and operational risk. The mechanism prevents analysts from treating every visible change as unprecedented while still leaving room for genuinely new reactions. It also makes uncertainty explicit: the direction of a trend may be clear even when its eventual magnitude remains unknown.
Origin
Joe Davis described this model on Masters in Business while considering how the coronavirus crisis could permanently affect supply chains, automation, travel, and social behavior.
Core principles
- 01Major shocks accelerate trends already underway.
- 02Crises also provoke distinct social and political reactions.
- 03Pre-existing evidence is more reliable than speculation about wholly new behavior.
- 04The magnitude and duration of change remain uncertain.
- 05Operational resilience becomes more valuable after systemic failure.
How to run it
- 1
Define the shock
Describe the crisis, its duration, and the economic, operational, and social systems it disrupts. Distinguish direct effects from secondary consequences.
Pro tip Use a fixed observation date so later information does not leak into the initial analysis.
Watch out Do not assume every simultaneous change was caused by the crisis.
- 2
Establish the prior trends
List relevant trends that demonstrably existed before the shock. Record evidence showing their earlier direction and momentum.
Pro tip Use adoption data, investment patterns, or established industry behavior rather than isolated anecdotes.
Watch out A newly visible trend may still have existed before the crisis.
- 3
Measure acceleration
Assess how the shock changes the speed, reach, or urgency of each prior trend. Identify the constraints that the crisis removed or intensified.
Pro tip Compare pre-shock and post-shock incentives for customers, firms, and regulators.
Watch out Temporary emergency adoption does not guarantee permanent behavior.
- 4
Identify reactive changes
Document social, political, and regulatory responses that arise specifically because of the shock. Keep these separate from accelerated trends.
Pro tip Look for changes in risk tolerance, public expectations, and policy priorities.
Watch out Initial reactions may reverse once immediate danger recedes.
- 5
Translate into decisions
Convert the two sets of effects into risks, opportunities, and strategic options. State the assumptions controlling each conclusion.
Pro tip Develop actions that remain useful across several plausible magnitudes of change.
Watch out Do not disguise uncertain magnitude estimates as precise predictions.
In the wild
A manufacturer observes that lean, just-in-time production existed long before a pandemic. The crisis accelerates an existing discussion about resilience, while political pressure for domestic capacity emerges as a separate reaction. Management evaluates dual sourcing and additional inventory against the probability and cost of future disruptions.
→ The company adopts targeted redundancy without abandoning every efficiency gained from lean production.
A financial firm identifies remote collaboration as a pre-existing trend accelerated by a prolonged office closure. Employee demands for location flexibility are classified as a social reaction. The firm tests which activities remain productive remotely and redesigns policy around measured results rather than declaring the office obsolete.
→ The firm creates a resilient hybrid operating model tied to task requirements.
Common mistakes
Calling every change unprecedented
Failing to inspect pre-crisis trends produces exaggerated forecasts and overlooks the mechanisms already driving adoption.
Confusing emergency use with permanence
Behavior adopted under compulsion may disappear when constraints lift, so analysts must test whether incentives persist.
Forecasting direction without assumptions
A plausible direction can still depend on uncertain health, political, or economic variables that must be stated explicitly.
Is it for you?
Best for
It is best for leaders, investors, and policymakers assessing the long-term consequences of systemic shocks.
Not ideal for
It is not ideal for precise short-term forecasts or situations without evidence of pre-existing trends.
From the transcript
“it accelerates a trend that was already in place before the shock began.”
“And then secondly, UM, there are typically i'll call them social or political reactions to very shock itself.”
“you may start to you know, assign a little bit greater um, you know, assets or investment into uh, adding redundancies into the system.”
From the episode
Barry Ritholtz Discusses WFH’s Impact on the Economy (Podcast)