Why did the bankers behave so badly?
by ilene - May 18th, 2009 3:25 pm
Of the three factors outlined, I think the weakest argument is made under the heading "Sexism and the City." Not saying that testosterone plays no role in "poor behavior," I just doubt it played a major role. It would be interesting to compare the effects of testosterone to other biochemicals acting neurological pathways that appear to affect risk-taking, such as dopamine. – Ilene
Why did the bankers behave so badly?
By Anne Sibert, courtesy of VoxEU
Greedy bankers are getting most of the blame for the current financial crisis. This column explains bankers did behave badly for mainly three reasons. They committed cognitive errors involving biases towards their own prior beliefs; too many male bankers high on testosterone took too much risk, and a flawed compensation structure rewarded perceived short-term competency rather than long-run results.
Many people share the blame for the current financial crisis; politicians, supervisors, regulators and even imprudent households and businesses. One group, however, has been judged to be especially guilty; the employees in the financial services sector. In response to their perceived greed and bad judgment, the US House of Representatives passed a bill that would effectively confiscate the 2008 bonuses of employees of financial firms receiving significant bailout assistance. In the UK, vandals smashed the windows and trashed the Mercedes of the former head of the Royal Bank of Scotland, while protestors tried to take over a London branch of the bank. In Iceland, financiers have wisely fled the country.
The populist outrage may be excessive, but it is hard to deny that certain aspects of these employees’ conduct were undesirable. Bankers imprudently counted on a continuation of the US housing boom long after most economists predicted its demise; they were overly sanguine about sustainable leverage ratios; managers of insurance companies and pension funds failed to exercise sufficient caution when they purchased collateralised debt obligations and asset-backed securities that they did not understand or know the value of. Since few would characterise the bankers and other employees of financial firms as an unintelligent group, it is interesting to ask why they behaved in such an egregious fashion; I advance three theories.
Humans are prone to cognitive errors
The first explanation is that humans are prone to cognitive errors involving biases towards their own prior beliefs. A vast empirical psychology literature documents that