SENYALS DE PERILL, PRECEPTIUS I DE REGULACIÓGBB1

Contemporary finance theories posit that the decision-making agent is rational. Rationality in the behavioral economics literature suggest that when agents receive information, they compare against what is known, update that information if required and make decisions consistent with expected utility theory (Roubini and Mihm 2011; Shiller 2005; Simon 1997; Tversky and Kahneman 1986, 1992). However, what is now evident is that these behaviors were inconsistent with the rational perspective and reflected a fundamental failure in cognitive processing. Patrick Honahan (2008: 3) Governor of the Irish Central Bank suggested that in an effort to compete in the marketplace, loan to value (LTV) ratios were increased, lending standards and stress testing of loans were relaxed and the reckless lending practices became the modus operandi de jour. Honahan (2010a) described Irish bank lending practices as neither safe nor sound and constituted socially harmful risk-taking behavior. This supported the position that organizations which emphasized risk-taking and advantage taking behavior do so even at the risk of stability and growth (Berson et al. 2008). This dispositional orientation may become a cultural value resulting in situations where excessive risk-taking overrides rational decision-making behavior (Barth et al. 2012; Stein 2011; Stiglitz 2010; Tett 2010b). The question however, is whether this excessive risk-taking is conscious or unconscious. That is, whether the behavior is the result of an unconscious ideological belief or is the outcome of a well-constructed cognitive process.

Government commissioned reports exploring the causes of the financial crisis in Ireland, UK and US have fallen broadly in line with the mainstream academic findings that the financial crisis was the result of: regulatory failures (Barth et al. 2012; Honohan 2010b; Shleifer and Vishny 2010; Stiglitz 2010; Treasury Select Committee 2009a), poor macro-prudential policies (Davies 2010; Ferguson and Johnson 2009; Guillen and Suarez 2010; Haldane 2010; IMF 2009), excess liquidity, insufficient capital buffers and high-risk lending strategies

(Carruthers 2010; Collier 2011; Davis 2009; Gaffney 2009; Pozner et al. 2010), management and leadership failures (Board 2010; Boddy 2011; De Cock et al. 2011; Fahlenbrach and Stulz 2011; FSA. 2011; Haiss 2010; Kling 2010; McLean and Nocera 2010), and intellectual and ideological failures (Gärling et al. 2009; Haldane 2011; Krugman 2009, 2012; Roubini and Mihm 2011; Stacey 2010; Tett 2010a; Wang et al. 2011; Whittle and Mueller 2012). Consistent themes however, that have emerged throughout the multi-perspective [regulatory, structural, people / organization / institution] analysis exploring the root causes of the financial crisis have been intellectual and knowledge failures and widespread overconfidence within the field of banking and finance (e.g. Nyberg 2011; Treasury Select Committee 2009a, b; US Senate Report 2010).

Within this literature then there is a tacit understanding that cognitive and behavioral actions may have warranted a more incisive critique with a number of scholars attempting to address these central themes. Munir (2011: 115) for example, raised some important questions aimed at illuminating the institutional variables that may have had a bearing on why so many individuals and financial institutions engaged in similar dark side behaviors. He posited that the financial crisis reflected an interesting narrative that highlighted “shifting logics – from one that placed markets within society to a view that understands society in terms of markets”. Similarly, Tett (2009c: 6-7; Tett 2010b) joined in this quasi-anthropological narrative in understanding the behavior of banking professionals and applied metaphors such as “icebergs” to describe the opaque nature of the debt, credit and derivatives markets. This opacity lent itself to obscuring the dangers that hid behind structured finance – those that professed to understand the complexity of these products could in essence frame the narrative of the public. Tett’s utilization of Bourdieu’s (1977) concept of silences illustrated how banking professionals had become the new social elites (Scott 2008b; Zald and Lounsbury 2010) that controlled the cognitive map of the public when it came to understanding finance.

In her view, contrarians would have had difficulty in challenging the established and legitimate narrative, a point supported by Honohan (2010c: 16), the US Senate public hearings (2010: 201) and the FCIC (2011: 142).

Peter Nyberg’s (2011: iv) report on the Irish banking crisis noted that “pervasive pressure for consensus and a willingness to adopt policies and practices that later proved unsound” had contributed to a convergence of risk-taking dispositions and decision-making practices within Irish banking institutions. It was this pervasive pressure that prompted Nyberg’s Groupthink and herding hypothesis in explaining the behavior in Irish banking institutions. Similarly, Regling and Watson’s (2010: 6) preliminary report on the Irish banking crisis argued that “internal procedures were overridden, sometimes systematically” and the tendency to engage in risky behavior became legitimized within a “socio-political context” that would have required courage to challenge this destabilizing behavior.

While both Regling and Watson (2010) and Nyberg (2011) highlight dark side behavioral issues that extended beyond banking institutions, there has been surprisingly limited analysis of why those behaviors became normalized. Nevertheless, Nyberg (2011) cited Groupthink as synonymous with the extremist collective behavior of many institutional actors in the Irish context. Although Janis’ (1982) concept of Groupthink does provide some evidence to support Nyberg’s notion of collective cognitive capture, the concept of Groupthink reflects a ‘group’ or top management team’ proclivity to engage in similar cognitive and decision- making processes and fails to address collective cognition on a much larger scale. Groupthink reflects a “mode of thinking that people engage in when they are deeply involved in a cohesive ‘in-group’, when the members’ striving for unanimity overrides their motivation to realistically appraise alternative courses of action” (Janis 1982: 9). It is therefore, situated at group-level and although some of the symptoms of Groupthink such as: a) an illusion of invulnerability, b) an illusion of morality, c) rationalization, d) stereotyping, e) self-

censorship, f) an illusion of unanimity, g) contrarian condemnation, and h) reliance on cognitive gatekeepers to maintain the status quo are similar to those of narcissistic characteristics – they do not translate to higher levels of abstraction. If however, we consider Furnham’s (2011: 121) argument that norms and values in the workplace may have the capacity to condone and promote “narcissism” within the organization’s culture then culture becomes that organizational dimension in which cognitive similarities can evolve. If, as Furnham (2011) argues organizations may have selected, sought and praised those with self- esteem bordering on narcissistic personality disorder, then perhaps this HR interventions may have had played a central role in the financial crisis. If embedded narcissism can become a “property” of an organizations “culture as well as the individuals” it is plausible that rather than being on the periphery of the financial crisis HR interventions played a more significant role in embedding dark side behaviors.

The FCIC established that socio-political dimensions exacerbated the impact of the US financial crisis. In their report, the FCIC observed that irresponsible lending, predatory and fraudulent practices and the unwillingness of regulators to address these “pervasive” behaviors was made more difficult as a result of “turf wars” between various regulatory agencies tasked with regulating banking institutions (FCIC 2011: xxiii). In what might be considered regulatory capture, the Senate Hearings found that the Office of Thrift Supervision [OTS] had taken a “protective” stance over Washington Mutual [WaMu] and not only defended its financial position but actively sought to limit the Federal Deposit Insurance Corporation’s [FDIC] examiner’s access to WaMu despite strong evidence of a deteriorating financial position. The Senate investigation may also have uncovered evidence of how some banking institutions engaged in manipulative tactics (US Senate Report 2010: 197) that not only captured institutions tasked with regulating behavior but may have uncovered how institutions embraced the organizational identity of those being regulated. Whilst, regulatory

capture is typically associated with information asymmetries, and incentives or revolving doors, the financial crisis was somewhat different in that the asymmetries reflected intellectual and knowledge [cognitive] rather than information (Honohan 2010b: 9; Treasury Select Committee 2010: Q2354). Both intellectual and knowledge asymmetries depict a higher level of understanding and ability [cognitive] whereas information asymmetries reflect one party having access to more information with which to make informed decisions than another party.

While these cognitive and behavioral issues reflect power asymmetries symptomatic of regulatory tensions (Oliver 1991: 159) they also illustrate the failure of people and organizational development policies. Indeed, they point to a range of HR failures that include recruitment & selection, management & leadership development, organizational & culture development, rewards & incentives, career development and most importantly the development and management of ethics and long-term organizational sustainability.

The financial crisis has adversely impacted societies, organizations and individuals. However, what is most revealing about the financial crisis concerns the way in which organizations have behaved and the consequences of such behavior for the stability of the world economy (Barth et al. 2006; Lehman and Ramanujam 2009). Numerous examples of inappropriate individual behavior are highlighted in many of the official reports and indicate that these behaviors did not develop as a short-term response to market pressures – these behaviors developed over an extended period of time in which identities, professional affiliations and membership of elite groups grew organically (Goldman 2009; Honohan 2010b). Human resources [people] are both capable of conferring sustained competitive advantage in organizations but are also capable of counterproductive or dark side behaviors (Munir 2011; Stein 2011) that can potentially damage the organization, and society in the

long-run. The various financial crisis inquiry commissions have illuminated failures at the individual, organizational and institutional level.

In the context of the financial crisis, the most pervasive dark side behaviors evident at the institutional level included: banks and financial institutions misleading or lying to regulatory authorities concerning their risk exposure and financial stability (see FCIC Report 2011; FSA. 2011; Honohan 2010b; House of Commons Treasury Committee 2009; Nyberg 2011; Regling and Watson 2010; Treasury Select Committee 2009a, 2012; US Senate Report 2010); engaging in reckless lending practices and a failure to follow lending guidelines agreed with banking regulatory authorities (Blanchard et al. 2009); unethical practices by senior executives to cover up non-compliant practices and major liquidity problems (Hannon 2010) and the belief that risk was deemed irrelevant as a result of the infallibility of complex mathematical models (Carruthers 2010; Krugman 2012; Mattingly and Kopecki 2012; Pozner et al. 2010; Reinhart and Rogoff 2009; Roubini and Mihm 2011). This body of literature does not suggest a lack of awareness was at the core of the excessive risk-taking and poor decision-making behavior, it argues quite the opposite. It suggest that those in decision- making positions were aware of the risks but because their feeling of belonging to the organization or emotional connection to their profession that they had a heightened sense of pride in what they were doing that blind sighted them to the potential for a negative outcome as a result of their dark side behaviors.

Peter Nyberg, the Finnish Economist tasked with heading up the Commission of Investigation into Ireland’s Banking Inquiry noted that “professional pride” (Nyberg 2011: 31) rather than purely incentives-based bonuses may have explained why Irish banking professionals engaged in the excessive risk-taking behavior. Similarly, Adair Turner Chairman of the UK FSA argued that the greed, pride and out-of-control locker room cultures evident in many banking institutions in the UK represented a “fundamental issue

rooted in human nature and institutional cultures” (Q2210 Treasury Select Committee 2010: 286). Excessive risk-taking and poor decision-making [judgment] behavior occurred in an environment “rich in over-confidence, over-optimism and the stifling of contrary opinion” (Treasury Select Committee 2009a: 3) indicating that this behavior may have been influenced by affect or feelings [emotions]. Support for this argument is maintained by the fact that emotions such as pride, hubris, anger, and sense of invulnerability have been cited in the financial crisis literature (e.g. Rötheli 2010; Stein 2011, 2013; Treasury Select Committee 2013; Whittle and Mueller 2012) thus indicate that the affective [emotional] state of the actors may have been influenced the cognitive appraisals of the situation leading to both excessive risk-taking [as a result of heightened pride and sense of invulnerability] and poor decision-making [as a result of perception of total control of the environment].