Anyone who has read Gerd Gigerenzer’s Gut Feelings will recall the description in Chapter 10 of how the pressure to conform creates moral hazard. A powerful heuristic or default seems to operate: “don’t break ranks”. Failure to adhere can result in peer hostility. The experience of Paul Moore in trying to restrain HBOS executives reveals just how powerful and enduring a force that can be, assuming he is an accurate witness to his own experience at the bank. It goes some way to explain how groupthink can operate in the face of compelling contrary evidence. To quote from his memo to Tuesday’s Treasury Select Committee hearing:-
I am still toxic waste now for having spoken out all those years ago!
This might also reflect why today’s FT report leaking of an “independent inquiry” into Paul Moore’s allegations contained the following observations from the HBOS directors of his behaviour. A case of shooting the messenger?
They told KPMG that while Mr Moore’s technical abilities were “recognised as strong” and he gave his team a “strong sense of purpose”, they doubted his ability to work with his colleagues. His behaviour in one meeting was described by people interviewed by KPMG as “ranging from prickly to ranting to extraordinary to outrageous”.
For those not following these events, Moore was the head of Group Regulatory Risk Management for HBOS until 2005. He alleges that he argued with the board that HBOS’s sales culture was running out of control, creating huge risk for the bank should the economy and housing market turn downwards, and that there was a reluctance on the part of executives to have their decisions or behaviour challenged. At the time, HBOS CEO James Crosby dismissed his concerns and terminated his employment. Crosby then moved on to become deputy chairman of the Financial Services Authority. He resigned yesterday morning.
The full text of Moore’s memo is here. For the time being, it may be one of the most readable and historic documents of modern finance. One suspects there will be others.
Well, in his deposition to the Treasury Select Committee Moore mentions it, but I doubt that this five-minute module is mandatory yet at any business school. Let me know if I’m wrong.
Photo credit: Tim PennDonate and help me buy back my Fender ('About' tells you why) Tags: credit-crunch, Danny Kaye, don't break ranks, Gerd-Gigerenzer, groupthink, Hans Christian Anderson, HBOS, heuristics, James Crosby, Paul Moore
Tweet If you’re in London and interested in decision making, decide to be free the evening of September 23rd. Gerd Gigerenzer, one of the world’s leading heuristics gurus and Director of the Center for Adaptive Behavior and Cognition at the Max Planck Institute for Human Development in Berlin, will be opening the season at the […]
Tweet The RSA Lecture by Brooke Harrington last Thursday was a great deal of fun. In a few weeks the RSA will put up a full video on their soon-to-be relaunched website, so when I see that I’ll publish the link. As I mentioned before, Brooke’s work on diverse perspectives overlaps somewhat with that of […]
Tweet Brooke Harrington of the Max Planck Institute will be speaking at the RSA on Thursday 17th April, 1 pm, about the subject of her new book Pop Finance. Anyone hearing the news reported this morning about hormonal excess leading to bad risk-taking in trading will be interested in this from the synopsis of Brooke’s […]
In 2001 I was faced with a choice.
Sit quietly on the sidelines of a corporate collapse while hell was freezing over, find a new job, or attempt a management buyout.
The latter involved some breaking ranks: never a comfortable path, as Gerd Gigerenzer has shown. But in the circumstances, and in Schumpeterian terms, it would seem to have been honest and right to try. In a Chapter 11 auction, you need bidders quickly. They need to come from somewhere. With my colleagues, I decided we were as worthy as any. After all, we had been pretty neat in creating social networks, so we knew how to operate at high levels of productivity without the need for as many staff as most news companies. Remember, we had to operate in Reuters’ backyard — probably the reason we were so resourceful, necessity being the mother of invention and all that.
Bear Stearns played a small but disappointing role in this MBO attempt, as investment banker to the wider company sale, appointed by the company’s creditors. Surprisingly, as a thirty-something editor, this was the first management buy-out I’d attempted. So I needed help. I was pointed toward the bankers as I needed to prepare business plans and locate potential investors, but I was also still doing my bit trying to find a corporate buyer in London for the whole firm. As I recall, emails, calls and voicemails to Bear Stearns went unreturned. All I got for my efforts was a solicitation document pdf that I already had, and to which I’d made some contribution as a general manager, in any event.
Where Bear Stearns were too lazy to venture, I had to go find other help. It materialized in the form of London bankers Cazenove, who were systematic and supportive. Time worked against; all sorts of clocks are ticking in these sorts of end game, (although not as quick as must have happened over this past weekend).
It is just possible that, as an internal player, the rules put you at a disadvantage from the get-go. You feel an unwelcome visitor at the poker table — everyone else is expecting you to be clearing out the ashtrays. But I spent enough time at the table to lay down a couple of hands and get the chance to explain a little about the productivity benefits of social networks within the firm to a few of the great and good, who I guess might be grateful now for having had a little of that accumulated knowledge.
And one of the biggest ironies of it all: as we re-modelled our various news business lines to reflect an independent future, our strongest business plan identified that there was an untapped news market in a rapidly growing sector called credit derivatives. And we had the people who knew how to and wanted to cover it.
As we wake up each morning with the scale of the credit crunch appearing ever larger, I’ve wanted for a while, so long as you won’t think me a Jeremiah, to coin that old cliché from the Jaws movie for the sake of our central banker friends, uttered by Chief Brody (Roy Scheider) to Quint (Robert Shaw):-
- “You’re gonna need a bigger boat.”
And I wonder if, before too long, anyone is gonna get to say:-
- “Smile you son-of-a-bitch.”
Unfortunately, we may all now be in the same small boat.
For those unfamiliar with the movie, it goes something like this. As one YouTube commenter said: the shark still looks fake:-Donate and help me buy back my Fender ('About' tells you why) Tags: Bear Stearns, credit derivatives, credit-crunch, Gerd-Gigerenzer, Jaws, Schumpeter