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The Butterfly Effect

The butterfly effect is a phenomenon from chaos theory. It illustrates a situation of "sensitive dependence on initial conditions," in which a small change in initial conditions can cause large changes in long term behavior.

The phrase "butterfly effect" represents a special case in which a butterfly's wing can produce small changes in the atmosphere that will ultimately cause a tornado (or prevent the emergence of one.) A butterfly’s flapping wing represents a small change in the initial conditions of the system, which causes a chain of events leading to large-scale phenomenon. If the butterfly didn’t flap its wings, the track of the system (and the associated ultimate result) would be significantly different.

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Secrets and Strategy

"Let me tell you something nobody knows…" said one of the diamond manufacturers over our collective lunch a while ago, leaning closer to my ear so nobody could hear us. "There is this tycoon diamntaire who keeps track of fluctuations in the price of oil, dollar exchange rates and rough diamond prices. I am convinced that there is a hidden thread that connects and impacts the results of one to the other."

It seemed like I had been given a glimpse of a great secret! Speculation, however, in the diamond industry, is almost synonymous with any situation where the market is fed by hypothesis and gossip which almost never produces any significant results.

Adaptation is Everything

"It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change."

– Charles Darwin

As the diamond industry is an industry of luxury, naturally any small fluctuation in the global economy affects the balance of the diamond industry. Some fluctuations can be predicted, while others result from spontaneous whims of decision makers.

The only thing that can save the industry is learning to adapt to new situations quickly.

A recent “upset” illustrates this point beautifully. As everyone knows, the Rapaport pricing has long established itself as controversial practice. Yet it’s an accepted institution since it’s gone unchallenged year after year. But recently, someone thought to adapt. Instead of listing goods on RapNet below Rapaport’s published prices, they are being marketed at list price only, ultimately keeping sell prices confidential. It’s confusing the market and ultimately diffusing Rapaport’s power. In my mind, it’s a celebration of adaptation.

Your Turn

A butterfly’s wings can cause significant fluctuations in our industry. But if you cannot do anything to change an intolerable situation, you must learn to adapt according to each new situation.

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