How to Be Squeezed

How to Be Squeezed

A squeeze occurs when people have no choice but to do something, and do it right away, regardless of the costs.

Your other half is to defend a doctoral thesis in the history of German dance and you need to fly to Marburg to be present at such an important moment, meet the parents, and get formally engaged. You live in New York and manage to buy an economy ticket to Frankfurt for $400 and you are excited about how cheap it is. But you need to go through London. Upon getting to New York’s Kennedy airport, you are apprised by the airline agent that the flights to London are canceled, sorry, delays due to backlog due to weather problems, that type of thing. Something about Heathrow’s fragility. You can get a last-minute flight to Frankfurt, but now you need to pay $4,000, close to ten times the price, and hurry, as there are very few seats left. You fume, shout, curse, blame yourself, your upbringing and parents who taught you to save, then shell out the $4,000. That’s a squeeze.

Squeezes are exacerbated by size. When one is large, one becomes vulnerable to some errors, particularly horrendous squeezes. The squeezes become nonlinearly costlier as size increases.

To see how size becomes a handicap, consider the reasons one should not own an elephant as a pet, regardless of what emotional attachment you may have to the animal. Say you can afford an elephant as part of your postpromotion household budget and have one delivered to your backyard. Should there be a water shortage—hence a squeeze, since you have no choice but to shell out the money for water—you would have to pay a higher and higher price for each additional gallon of water. That’s fragility, right there, a negative convexity effect coming from getting too big. The unexpected cost, as a percentage of the total, would be monstrous. Owning, say, a cat or a dog would not bring about such high unexpected additional costs at times of squeeze—the overruns taken as a percentage of the total costs would be very low.

In spite of what is studied in business schools concerning “economies of scale,” size hurts you at times of stress; it is not a good idea to be large during difficult times. Some economists have been wondering why mergers of corporations do not appear to play out. The combined unit is now much larger, hence more powerful, and according to the theories of economies of scale, it should be more “efficient.” But the numbers show, at best, no gain from such increase in size—that was already true in 1978, when Richard Roll voiced the “hubris hypothesis,” finding it irrational for companies to engage in mergers given their poor historical record. Recent data, more than three decades later, still confirm both the poor record of mergers and the same hubris as managers seem to ignore the bad economic aspect of the transaction. There appears to be something about size that is harmful to corporations.

As with the idea of having elephants as pets, squeezes are much, much more expensive (relative to size) for large corporations. The gains from size are visible but the risks are hidden, and some concealed risks seem to bring frailties into the companies.

Large animals, such as elephants, boa constrictors, mammoths, and other animals of size tend to become rapidly extinct. Aside from the squeeze when resources are tight, there are mechanical considerations. Large animals are more fragile to shocks than small ones—again, stone and pebbles. Jared Diamond, always ahead of others, figured out such vulnerability in a paper called “Why Cats Have Nine Lives.” If you throw a cat or a mouse from an elevation of several times their height, they will typically manage to survive. Elephants, by comparison, break limbs very easily.