"Why Did Bankers Behave So Badly?"

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An article by Anne Siebert at VoxEU seeks to identify why bankers made such a mess of their companies. As the summary tells us:

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.

I have to differ with some of the assumptions here. What is odd about the article is it treats “bankers” only as employees. It thus does not look at how the failures of oversight came about.

For instance, trading has always been an almost exclusively male province, unlike other areas of finance (research, investment banking) where women have made reasonable inroads. The article suggests that having more women as traders would have helped. I’m not sure I buy that analysis.

There are also comparatively few women in asset management (as managers rather than as salespeople or buy side analysts). My premise is that for a woman to be a good trader, she’d have to have the risk seeking behavior of a successful male trader. In other words, successful candidates probably behave the same regardless of gender (how many top ranked female poker players are there? Are their behaviors materially different from that of male poker players?)

The real question is why did management fail to do a better job of reining in the aggression of traders? The nature of traders has not changed since, say, the early 1980s; what changed is the willingness of management to rein them in. That fell due the the fact that the industry went from private partnerships with unlimited liability to public corporations. As long as what the traders did appeared †o be profitable, management benefited too, since larger trading desk profits also meant larger bonuses for the MDs overseeing them.

To chalk this up to simple “bad incentives” puts a Wizard of Oz-type veil over the problem The leadership of good firms did not take on risk and drive themselves into what would have been bankruptcy en mass (would even Goldman have made it without the Fed’s various interventions, including all the special facilities and the interest rate cuts at critical moments? Doubtful). The “bad incentives” turn of phrase, while narrowly correct, does not put blame where blame was due. The industry’s leadership designed the compensation schemes; they were not visited upon them by a mysterious outside force.

From VoxEU:

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 people fail to put sufficient weight on evidence that contradicts their initial hypotheses, that they are overconfident in their own ideas and have a tendency to avoid searching for evidence that would their disprove their own theories. Psychologists attribute these cognitive errors, collectively known as confirmation bias, to several factors. These include emotional reasons, such as embarrassment, stubbornness and hope, and cultural reasons, such as superstition and tradition. There may also be physiological explanations; the evolutionary development of the human brain may have facilitated the ability to use heuristics which provide good judgements rapidly, but which can also lead to systematic biases. In addition, recent research supports the theory that the human brain arrives at outcomes – such as confirming one’s own beliefs – that promote positive and minimise negative emotional responses.

Sexism and the City

UK Labour cabinet member Hazel Blears suggests a second reason, commenting that, “Maybe if we had some more women in the boardrooms, we [might] not have seen as much risk-taking behaviour” (Sullivan and Jordan 2009). Indeed, the financial services industry – one in which lap dancing is apparently considered appropriate corporate entertainment (UK Equality and Human Rights Commission) – is overwhelmingly male dominated. Women hold only 17% of the corporate directorships and 2.5% of the CEO positions in the finance and insurance industries in the US (Sullivan and Jordan 2009). In Iceland – home to a particularly spectacular collapse – it is said that there was just one senior woman banker, and that she quit in 2006 (Lewis 2009). If men are especially prone to being insufficiently risk averse and overly confident, then this male dominance may have contributed to the financial crisis.

There is a substantial economics literature on the effect of gender on attitudes toward risk and most of it appears to support the idea that men are less risk averse than women in their financial decision making.1 There is also a sizable literature documenting that men tend to be more overconfident than women. Barber and Odean (2001) find that men are substantially more overconfident than women in financial markets. In general, overconfidence is not found to be related to ability (see Lundeberg et al (1994)) and that success is more likely to increase overconfidence in men than in women (see, for example, Beyer (1990)). Thus, if confidence helps produce successful outcomes, there is more likely to be strong feedback loop in confidence in men than in women.

In a fascinating and innovative study, Coates and Herbert (2008) advance the notion that steroid feedback loops may help explain why male bankers behave irrationally when caught up in bubbles. These authors took samples of testosterone levels of 17 male traders on a typical London trading floor (which had 260 traders, only four of whom were female). They found that testosterone was significantly higher on days when traders made more than their daily one-month average profit and that higher levels of testosterone also led to greater profitability – presumably because of greater confidence and risk taking. The authors hypothesise that if raised testosterone were to persist for several weeks the elevated appetite for risk taking might have important behavioural consequences and that there might be cognitive implications as well; testosterone, they say, has receptors throughout the areas of the brain that neuro-economic research has identified as contributing to irrational financial decisions.

If – as the research may suggest – men are less risk averse than women, then a work group composed primarily of men (or primarily of women) may be a particularly bad idea. A vast psychology literature documents the phenomenon that group deliberation tends to result in an average opinion that is more extreme than the average original position of group members. If a group is composed of overly cautious individuals, it will be even more cautious than its average member; if it is composed of individuals who are overly tolerant of risk, it will be even less risk averse than its average member (Buchanan and Huczynski 1997).

Bonuses distort behaviour

In a recent paper, Hamid Sabourian and I advance a third reason for the behaviour of bankers; a flawed compensation structure that rewards perceived short-term competency, rather than good long-run results causes bankers to distort their behaviour in an attempt to increase their perceived ability (Sabourian and Sibert 2009). We suppose that a banker’s choices are unobservable. Bankers differ in their ability to make the correct decision and this ability is known only to themselves. In the long run, it can be determined whether the action chosen is the best one or not and the banker would rather make the correct decision than the wrong one. However, in the short run, the banker’s bonus depends upon how competent he is perceived to be.

In the first variant of our model, we suppose that a banker chooses an action and is then confronted with publicly observable conflicting information. He then chooses whether or not to change his course of action. If he is especially competent, then he knows that his original choice is probably still the best and does not change it. If he is less competent, the conflicting information tells him that his choice is probably not the best. We show that, for a range of banker competencies, even if the banker realises that his original choice is not likely to be the best, he does not change it. Instead, in the interest of receiving a higher bonus, he mimics an especially competent banker and continues with his original decision.

In the second variant of the model, the banker chooses an action. There is no publicly observed information in this case. Instead, the banker is asked how likely he thinks it is that his decision is the best. We think of this as a proxy for how strongly the banker sells his views to his employer or customers. In the long run, if the banker’s decision is wrong, he bears a cost that is increasing in his stated confidence. Even though it can be costly to claim to be correct with high probability and there is no intrinsic benefit from being overly optimistic, if bankers who are perceived to be especially competent receive high enough bonuses, then all bankers will imitate the most competent and oversell their decision.

In the third variant of the model, the banker chooses an action and is then given the opportunity to acquire additional information, at a cost, which, if his initial choice is incorrect, might confirm that it is incorrect. The banker could then abandon his original choice. Highly competent bankers are unlikely to devote resources to questioning their decision as they are unlikely to be wrong. Thus, less competent bankers attempt to increase their bonuses by masquerading as more competent ones; they do not search out additional information either.

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  1. Charles

    “The “bad incentives” turn of phrase, while narrowly correct, does not put blame where blame was due. The industry’s leadership designed the compensation schemes; they were not visited upon them by a mysterious outside force.”


    The compensation schemes are a product of cranky economic theories, both from the left (Keynesianism) and from the right (Supply Side Economics), that are all justifications of what is essentially a Ponzi scheme at a governmental and national level. Legitimizing Ponzi scheme at the highest level is putting the rot into the head of the proverbial fish.
    It was then inevitable that the deception business for bankers (including a lot of self deception…), and the chicanery business for lawyers became the career of choice for the best and brightest of Generation X and Y,especially in english-speaking countries.

    I cannot resist quoting Keynes at the end of his GT :
    “I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.”

  2. Doc Holiday

    TARP is simply a matter of remasculinization for old bankers who may have flaccid paralysis.

    FYI from Wiki:

    In 1927, Koch and his student, Lemuel McGee, derived 20 mg of a substance from a supply of 40 pounds of bovine testicles that, when administered to castrated roosters, pigs and rats, remasculinized them. The group of Ernst Laqueur at the University of Amsterdam purified testosterone from bovine testicles in a similar manner in 1934, but isolation of the hormone from animal tissues in amounts permitting serious study in humans was not feasible until three European pharmaceutical giants—Schering (Berlin, Germany), Organon (Oss, Netherlands) and Ciba (Basel, Switzerland)—began full-scale steroid research and development programs in the 1930’s.

    This may be related to MEFO Bills also, but I doubt it…

  3. Hydroponics Book

    I have what I feel is a better suggestion for how this all transpired…. We are in the late stages (upper leverage curve) of a fractional reserve banking model, and there are very few good options are left.

    For the bankers… I seriously question the thought that Henry Paulson was incompetent/ignorant when he lobbied congress in 2004 to loosen leverage limits, and I dont think all of the other players were any more incompetent for increasing their leverage ratios. In Paulson’s case, I think he saw additional leverage as the best bet to keeping the industry/economy moving forward.

    On the regulator side, I do not believe they were any more ignorant/incompetent either. They no doubt breathed a sign of relief when they thought that the unregulated securitization market would be the answer to how to safely allow additional leverage into the system. i also suspect that they watched in horror when they realized the entire securitization model was crashing down at such a light speed pace.

    The scary part to me is not how we got here, but that no one yet has come up with where we go from here. It is rather obvious that the federal government cannot keep leveraging higher indefinitely, the sums are too large to inflate your way out of it, and there does not appear to be any way that consumers and/or businesses can make up the difference. If we can get china’s 1.1 Billion people to leverage that might help, but this scenario seems highly unlikely as well, but until this question is answered, it does not take a Nobel laureate economist to predict where the global economy is headed.

  4. DownSouth


    Great quote from Keynes.

    Here’s one from another source:

    [I]t is impossible to justify the degree of inequality which complex societies inevitably create by the increased centralization of power which develops with more elaborate civilizations. The literature of all ages is filled with rational and moral justifications of these inequalities, but most of them are specious. If superior abilities and services to society deserve rewards it may be regarded as axiomatic that the rewards are always higher than the services warrant. No impartial society determines the rewards. The men of power who control society grant these perquisites to themselves. Whenever special ability is not associated with power, as in the case of the modern professional man, his excess of income over the average is ridiculously low in comparison with that of the economic overlords, who are the real centers of power in an industrial society. Most rational and social justifications of unequal privilege are clearly afterthoughts. The facts are created by the disproportion of power which exists in a given social system. The justifications are usually dictated by the desire of the men of power to hide the nakedness of their greed, and by the inclination of society itself to veil the brutal facts of human life from itself. This is a rather pathetic but understandable inclination; since the facts of man’s collective life easily rob the average individual of confidence in the human enterprise. The inevitable hypocrisy, which is associated with all of the collective activities of the human race, springs chiefly from this source: that individuals have a moral code which makes the actions of collective man an outrage to their conscience. They therefore invent romantic and moral interpretations of the real facts, preferring to obscure rather than reveal the true character of their collective behavior. Sometimes they are as anxious to offer moral justifications for the brutalities from which they suffer as for those which they commit. The fact that the hypocrisy of man’s group behavior…expresses itself not only in terms of self-justification but in terms of moral justification of human behavior in general, symbolises one of the tragedies of the human spirit: its inability to conform its collective life to its individual ideals. As individuals, men believe that they ought to love and serve each other and estabilish justice between each other. As racial, economic and national groups they take for themselves, whatever their power can command.~

    –Reinhold Niebuhr, Moral Man & Immoral Society

  5. Hugh

    There are all of these paradoxes out there. I have one called the paradox of greed. You see it is in the interest of any individual bank to game the system as much as possible and maximize their short term profits off of volume and fees. However when all banks do this, none are looking out for the long term health of the underlying economy which must support all this gamesmanship and the system collapses. This used to be called the killing the goose that laid the golden egg but now we talk about these things in terms of information asymmetries and paradoxes. Still however you describe it the goose is just as dead.

  6. Anonymous Jones

    I am confused by the marginalization of the “incentives” arguments. It’s turtles all the way down, isn’t it? It’s not just the incentive structure of the traders, but the incentive structure of the MDs and the incentive structure of the top management (especially after they realized they could gamble the whole enterprise with OPM after the IPOs at places like Goldman) and the incentive structure of the regulators (why be harsh to your potential future employer?). All the incentives were aligned for the debt bubble and its inevitable bust. Chalking this up to some sort of moral failure strikes me as naive and, perhaps more damning, irrelevant.

    I’m always of the opinion that if you don’t want something to happen, you better incentivize everyone to not want that thing to happen. We disincentivize things that are supposedly “immoral” like stealing a loaf of bread, polluting a river, and murder, but we also disincentivize negligence, which leads me to believe there is no moral basis at all but rather just the sound evolution of behavior management in society. And thus it was, I assert, our fault, in a democratic society, to not set in place proper disincentives for the behavior that occurred. We must have thought it was just not so bad, or we were complicit, or we figured it was someone else’s problem.

    Further, I’m troubled by all this risk-seeking talk. Goldman became public precisely because of risk aversion. Executives at all types of firms often cash out stock options as soon as they can in order to diversify and bank their winnings. People generally want to make their money as soon as they can and then never want to lose a cent of it. As studies have thoroughly shown, losing a dollar generally has a greater psychological impact than making a dollar. I meet very few people who actually seek risk. Who wouldn’t want to be paid the same without risk? All these people hire lawyers, don’t they? Why would they do that if they were seeking risk? They are thinking constantly about how to reduce their own risk.

    As you have written before, a lot of this was bankruptcy for profit. You take the gains knowing all the while that you will likely never have to suffer the consequences. This is not risk-seeking behavior. This is looting.

  7. Jojo

    Businessweek had a good article on global banking a couple of weeks back:
    In Depth May 6, 2009

    The Perils of Global Banking
    Selling through subsidiaries, banks have left investors across the globe holding potentially toxic bonds. Now governments may restrain foreign financial firms

    By David Henry and Matthew Goldstein

    JA Solar Holdings, a once-thriving Chinese manufacturer of solar-power cells, is getting a rude introduction to the dangers of global finance. So is Peter Howard, a retired British tax official. And so are Cedric Ruber, a Belgian school inspector, and his father, Rene, a retired employee of the U.S. Army.

    Each is trying to recoup money from Lehman Brothers, whose bankruptcy in September paralyzed the world economy. They’re just a few of the tens of thousands of burned investors around the world complaining loudly that they were sold toxic bonds that were supposed to be safe. In street demonstrations from Hong Kong to Hamburg, protesters are demanding that their governments do something to get their money back.

    Now there’s a growing fear among economists, policymakers, and business groups that in the name of protecting their citizens from global financial institutions, governments could slow the flow of capital between countries–at a time when the world economy is already contracting. “We’re looking at a period of, at best, a pause of globalization, and more likely a period of ‘de-globalization,’ ” Mohamed El-Erian, chief executive officer of bond giant PIMCO, said at a conference on Apr. 27. Governments are already moving to impose new hurdles on foreign firms. Regulators in Britain have started asking U.S. banks selling bonds there to provide hundreds of pages of proof that the mighty U.S. government, which is backing the bonds, could actually repay them.


  8. Greg Hall

    No matter which country you visit, bankers share the same characteristics: they’re basically arrogant morons.;-)

  9. step314

    Much of it is what typically causes mere selfishness to turn into evil: believing your own hype. Make out your business is an especial collecting of golden eggs from geese, and you might start believing it, especially if you’ve got the power, reputation and money to push the deception effectively. And it’s not as though the geese (the originators of debt) are going to discourage these excessively aureate assays of what they have laid.

  10. Independent Accountant

    Anonymous Jones:
    The conversion of Wall Street houses like Goldman from partnerships with unlimited liability to corporations changed the Goldman entrepreneurs into hired help. As hired help they had different incentives, i.e., maximize compensation and let the public pick up the pieces. You use the term “looting”. Absolutely.

  11. Charles

    @DownSouth : Great Quote !

    Complex societies are indeed massively non-cooperative games. When you couple this feature with evolutionary pressure, the incentive for deception is real. Therefore, I am not so sure than Man is “naturally” moral as the title of your book extract seems to suggest, and only society immoral. Rousseau may have believed it, but after a detour through Darwin and Malthus, it really appears that Man is a social animal whose immorality lies in its inner social fabric.

    Note that it is not peculiar to the human race though, there are numerous example of “immoral” behavior that are rewarded in the animal kingdom. There are fascinating experience on rats population that shows that removing dominant “non cooperative” individual from a group is useless: there is always a new dominant sub-population that will emerge.

    Is there a way out of this ? Exposing and accepting the truth may be one. That is what Rene Girard believes, but it is a steep way indeed…

  12. carol765

    VoxEU: ¨The populist outrage may be excessive¨

    To me, this disqualifies the VoxEU writer completely. Up till now, the outrage has been remarkably subdued.

    Yves: 1) ¨The industry’s leadership designed the compensation schemes¨


    Yves: 2) ¨The leadership of good firms did not take on risk and drive themselves into what would have been bankruptcy en mass¨

    Not sure.

    Just combine 1) and 2). The leadership designed the compensation schemes, and the leadership focused only on the short-term. Remember that extensive story about the inner-working at Countrywide in 2004-2007: employees who did not want to extent a super-jumbo mortgage to a poor soul was told to give out the loan or leave the company. The CEO bonus was revenue based, I.e. the higher the mortgage the better.

    And why didn´t those CEO worry about the longer term?
    Well, their short-term bonuses were so outrageously high, that they did not need to worry about a long-term or bankruptcy.

    With federal minimum wage at $ 5,70/hr, this amounts to $ 12.000,- per year. Say working for 50 years: $ 600.000,- over working lifetime.
    Compare that to GoldmanSachs CEO bonus: $ 60 million in 2007. So a bonus-banking CEO gets (note: I cannot write ´earns´) in a single year 100 times the amount of a minimum wager during 50 years of work (OK, people do not stick at the minimum wage, most make some progress, but order of magnitude the insane difference is clear). So, the CEO´s get more in 1 year than they need for the rest of their lives.

    Anonymous Jones: ¨This is looting.¨

    VoxEU: ¨the banker’s bonus depends upon how competent he is perceived to be.¨

    Utter nonsense. One of the many shocking aspects of this crisis has been that there was no competency in the bonus formula. It was revenue growth, accounting (i.e. paper) profit, or as William Black claims (see Icelandic video linked to last week): Fraud.
    Perhaps the VoxEU writer refers to competency to mislead regulators. But that doesn´t cut it either, as that has been revealed to be extremely easy.

  13. DownSouth

    Charles said: …”after a detour through Darwin and Malthus, it really appears that Man is a social animal whose immorality lies in its inner social fabric.”

    There are two competing views of human nature. One is that embraced by the New Atheists–that man is “red in tooth in claw.” This view holds that, even though man may attempt to disguise himself with a thin veneer of civility, at heart is the true rapacious self. The competing view was that articulated by Niebuhr, and it is considerably more complex. He acknowledged that there was indeed a rapacious self, what he called “the will to power.” But in addition to that was also a “will to live,” which Niebuhr said manifested itself as “love and duty.” These are the traits that impel the stronger members of a family or tribe to care for the weaker members.

    Niebuhr argued that “love and duty” thrived in environments high in intimacy, which complex societies are of course notoriously devoid of.

    It is ironical that recent research in the field of evolution, genetics and neuroscience seems to confirm Niebuhr’s–the man of God’s–view and not that of the New Atheists, who hold themselves out to be scientists and rationalists. Here are some links to presentations that discuss some of the latest developments in those fields:





    Instead of “love and duty” the scientists speak of “fairness and empathy,” and instead of talking about “intimacy” the scientists talk about “touch and sight,” but the idea is the same–touch and sight trigger feelings of fairness and empathy (measured by brain activity and brain chemistry). And these benevolent impulses are very much hardwired into our brains.

    But not all brains. As Paul Zak points out, there are about 2% of humans who have a differnt brain chemistry and do not exhibit empathy or fairness. Furthermore, situations of great stress (he uses as an example an environment such as that created by Enron management) seem to induce the brain chemistry that leads to a lack of empathy and fairness. Could it be that the 2% with abnormal brain chemistry make up a disproportionate share of corporate executives?

    (I also found intriguing the study that Marco Iacoboni cited that even monkeys refuse to parcipate in rigged activities where rewards are not proportionate to effort.)

    Anyway, as the little piece of ground that the New Atheists stand upon slowly gets eroded away, I find their reaction fascinating. Here’s Richard Dawkins, who perhaps took Ayn Rand’s place as the leading evangelist of the cult, with a lecture that begins at min. 47:00…


    As one can see, the New Atheists have now been forced to admit that there is an immutable “good Samaritan” side to human nature. But as one can also discern, Dawkins surely doesn’t like it. He calls it a “mis-fire” or “mistake” from our ancestral past, from a time when humans lived in smaller family or tribal groups, explaining that it results from the mechanisms of “kinship, recipricocity, reputation and the handicap principal.” “Misfire” and “mistake” are of course terms loaded with judgment, Dawkins’ implication being that the good Samaritan gene no longer contributes to our reproductive success or survival success.

    However true or false that may be, it is nevertheless not the job of “scientists” to be making pronouncements about what ought to be or what ought not to be. That is the domain of preachers. True scientists dwell in the land of is, not in the land of ought.

  14. carol765

    J said: “This is Anne Sibert, the wife of Willem Buiter.”

    so the writer is from the UK. That makes her statement re excessive outrage all the more disqualifying.

    The behavior in the City was excessive, and has left the UK (future) taxpayers with in incredibly high tax bill. Contrast that to a broken bank building window.

    So the writer has detailed knowledge of the failures of Icelandic banks, which has bankrupted the country. The Icelanders and their children and their grandchildren are facing a huge bill. Contrast that to the demand for an early general election. Wow! How excessive!

  15. AP

    Because they could. Given the choice, would you? How about with relative anonymity and protection from pesky laws with all that ‘money’ you’re making? Makes it even easier.

  16. Eric L. Prentis

    A major culprit in the 2008-09 credit crisis is control fraud, bank CEOs gamed the system with bad loans for their own bonus-induced benefits. Plus, bankers knew the Fed, their own privately controlled institution, would bail them out, also, bankers have US politicians at their beck and call. In addition, bankers’ money bought off most academic financial economists which is why we are working under theories that support the banks’ looting, e.g., assuming self-equilibrating markets, no government regulation of new financial products is optimal, the formation of too-big-to fail financial institutions frees the markets to perform effectively, securitization reduces risk in the financial system, the stock market operates like a large casino and the efficient market hypothesis, which underpins most financial-economic statistical models, are theories that are either incorrect or severely flawed and is why risk management’s value-at-risk models did not predict this devastating economic crisis. From a realist’s standpoint, when fighting the power of the banks, just try getting a research paper critical of any of the above theories published in a leading peer-reviewed academic journal, the self-described reviewing experts either simply reject the effort out of hand because it doesn’t comply with the existing approved theory or say they don’t understand it. Corporate and government looting, political bribes and accounting payoffs are both disgusting and economically counterproductive. US society is rotten from the top down, greedy bankers, slimy politicians and on-the-take academics should be ostracized from polite society. Dare I say it, we need a new order.

  17. Methinks

    I’m certain if we only we had paid people the way we pay post office employees, we would have had a much better result. Just look at how wonderfully all government agencies operate and how solicitous, hardworking and innovative government functionaries are. Why, I just go to the DMV for fun some days.


    I love the laser focus on incentives resulting from compensation schemes while completely ignoring the perverted incentives caused by government regulation and intervention.

  18. Yves Smith

    For once the error was someone else’s, not my typo. VoxEU posted the piece as Horst, not Anne, and e-mailed me asking to change it.


    The investment banks, when they were partnerships, did not go over the cliff en masse as they have this cycle. Just go check the history of the industry.

  19. carol765

    i do know that IB were partnerships before, and recall e.g. your posting about meeting Japanese who had info regarding GS difference in behavior before and after IPO.

    But, as you say, it were CEO’s who designed the bonus formula.
    I am saying that even if they had to bring the firm to the cliff’s edge, in order to obtain insanely bonuses, more than anyone could ever need in his whole life, no matter to luxurious lifestyle, they apparently have been prepared to do so. They are financially secured for the rest of their lives: mission accomplished!

    How else can one interpret CEO’s saying, well, we knew the party had to stop, we only did not know when, and we liked to dance while it lasted?!

  20. Charles


    Popper identified quite clearly that the true job of scientists is to propose what ought to be and check if it is confirmed by what is : the only gateway to the land of is is the land of ought.
    I indeed believe that there are some cooperation mechanism that are the result of evolution.
    However, as in many other aspects of our DNA evolved characteristics, these mechanisms are overwhelmed by the speed at which the environment is changing.
    Cultural evolution mechanisms (memes as some people call them) are faster reacting and indeed proved quite efficient at adapting throughout human history. Religion is probably the most successful and powerful one. It is noteworthy that religion played an essential part in credit mechanism since the early days of humanity (for instance, in Ancient Egypt, where there was no currency, the priests were in charge of certifying weights and measures that were used for bartering real goods (loafs of bread to be exact)). It would be indeed a sufficient cause for the priest class to exist. Some (and I am part of it) may maintaining the productive cooperation is their only role, but I can understand that believers do not concur with this view
    The problem now is that society changes at too fast a rhythm for established religions, leaving a dangerous moral void. If Bankers were supposed to be the new priestly class, they obviously failed in that dimension !

  21. skippy


    I have been enjoying your and Downsouths conversations in this thread. Although the marrow of the discussion seems, to me, is what can man grasp/hold on too, in order for “society_to_be cooperative”. Have not all these belief systems of our ancestors attached them selves to the wealth/toil of the common people for their benefit, especially mono-theocracy’s (children of god, in said god likeness, are gods in their minds, enabled to befoul their environment and unbelievers, judgment delayed to the afterlife and not in the hear and now), is this not the true moral hazard [?].

    Would it not be better to accept that we are judged day to day (cooperative) out side small infractions. I for one, would prefer some fashion of thought where life is viewed as a never ending theory where your “land of ought” is the path to “is” and society is careful not to mix the two up till “is” can be pronounced empirical (no flat world, round world conflicts).

    For all the proclaimed good, belief systems (for social order),in my interpretation of history is the most malevolent force in our history, continuously hijacked for the benefit of the few and the manipulation of the many.

    skippy…belife system or superstition system umm I invoke the X factor (belief) therefore discount all evidence contrary to my beliefs.

  22. DownSouth

    @skippy said: “For all the proclaimed good, belief systems (for social order),in my interpretation of history is the most malevolent force in our history, continuously hijacked for the benefit of the few and the manipulation of the many.”

    That’s certainly a pessimistic outlook, but one shared by many. In looking back on Edward Harrison’s post last week, “A populist interpretation of the latest Boom-Bust cycle,” perhaps it is the assertion of that worldview that gave me the most discomfort. Harrison cites Jared Diamond’s “The Theory of Kleptocracy” from Guns, Germs, and Steel and specifically Chapter 14, entitled “From Egalitarianism to Kleptocracy.” According to this theory of history, kleptocracy in complex socities is inevitable.

    My problem with such theories of history is that they draw the bow of life so taut that they snap the string, tending very readily to a moral, social and political indifferentism, defeatism or nihilism.

    This leaves me with no other option than to embrace a more optimistic theory of history, such as that posited here by Peter Turchin:


    And do the doomsayers not give us only half the truth? As Turchin says, should we not also look at the successes of these societies, and not just their failures?

    And what tremendous successes the Enlightenment as well as its economic paradigm, capitalism, have provided! As Richard Bernstein wrote in Dictatoriship of Virtue: “The plain and inescapable fact is that the derived Western European culture of American life produced the highest degree of prosperity in the conditions of the greatest freedom ever known on planet Earth.”

    On the pessimism-optimism spectrum, when Niebuhr wrote Moral Man & Immoral Society he ranked somewhere between the moral cynics (New Atheists) and the optimistic rationalists (contemporary examples would be Turchin and the scientists David Sloan Wilson and Jonathan Haidt). He expressed severe reservatons as to whether a coalition between factory workers, small farmers and white collar workers could materialize to match the power of the oligarchs:

    At any rate it is not safe to count upon the farmer as a political ally of the industrial worker, however much the logic of economic fact might seem to make him a natural ally of the proletarian. If we thus exclude the middle-class urbanite and the farmer as possible adherents of a parliamentary socialist party, we must arrive at the conclusion that the possibility of winning a parliamentary majority for evolutionary socialism is fairly remote and may be entirely out of question.~

    Niebuhr’s pessimism was of course proved wrong, and the New Deal did happen. But one must recall that when Niebuhr published Moral Man & Immoral Society in 1932, the dark clouds of totaliarianism had gathered over Europe and Russia, and the future of the U.S. was all but certain.

    So the United States has been in situations before similar to what it now finds itself. To assume that the triumph of the oligarchs is a certainly is therefore not a safe assumption. Democracy in the United States might just prove to be stronger than what you believe.

  23. Kevx

    Pretty simple, financial services, like most businesses, will need to be updated to reflect the new research in brain/biology. Nothing mysterious. This knowledge will increasing exponentially. To not do so may bring > risk & liability.

    Pretty mechanical really. Ho hum.

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