14th December 2011 by Mindful Money
When I saw the BBC headline ‘RBS woes caused by bad decisions‘ about the FSA investigation, I had an immediate reaction.
Not, perhaps unfortunately for the BBC and FSA, that this was a great revelation or an incisive piece of journalism but a concern about how many millions the investigation cost and whether the BBC would this year be given the Basil Fawlty award for “Stating the b****ing obvious”!
When I was thinking this, some of my colleagues were outlining some of the lessons that could be learned and highlighting the reliance the report places on the phrase, “in hindsight”
I have mentioned the habit of hindsight bias before, but there is a whole new quantum here.
Human beings assume they can understand the past. They can’t (life is too complicated for that). But what we do is oversimplify. We assume that if we hadn’t been delayed by tripping over the cat, then we would have just beaten the traffic light that would have got us to the station in time to catch the train and would have made the meeting and therefore
hat a small change (avoiding the cat) would have made only a small difference to the end result because everything else would have happened the same way.
But life is self organising system on the edge of chaos and has complex linkages. If we hadn’t tripped over the cat, we might have gone out and been involved in an accident, we might have lingered over our coffee and thus taken the call about a different job, all sorts of things might have happened. Life is non-linear, tiny differences in detail can sometimes make for huge differences in outcome.
It’s the “butterfly effect”, a butterfly flapping its wings in Kansas can mean Sevenoaks becomes One Oak, or it can mean New Orleans doesn’t disappear underwater.
We can’t understand and calculate all those things (like we can’t predict the weather months in advance).
But still we assume that we can say that if one small piece had been different, we can predict a particular different result accurately.
So when we see the FSA report we can think – if there had been better capital reserves the result would have been X. If Fred Goodwin hadn’t been so stupid and powerful, or the Non-executive Directors had stood up to him like they were supposed to, the crash wouldn’t have happened.
But actually, we have no idea what would have happened.
So the suggestions in that article are all sensible actions. But they are all actions for last time and hypothesise a future that is unknowable.
Stop one individual being too powerful, beef up the regulators, make sure the non-execs do their job.
All sensible moves. But who is checking that this happens?
They were supposed to be there anyway. Non-executives are supposed to play “Devil’s Advocate” – but they didn’t. After the crash in the 1920’s the capital rules were tightened – but then they were relaxed. The maverick CEO is supposed to be balanced by a Board (including the non-executives) – but they weren’t.
And the same pattern repeats. We set up rules to avoid problems, we drift along for a decade or two, the rules are relaxed, people only pay lip service to them (as with bothering about maintenance on the escalators at King’s Cross) and suddenly – crisis.
And everybody says, “we should have better regulations, we should do maintenance, we should have curbs on individual power”
But we had those regulations, we started off with a maintenance schedule, we had curbs on individual power. The problem was that they weren’t adhered to.
So it isn’t a bad idea to tighten regulation, to curb power, to do the 1001 things that might be suggested and investigate what needs to be done.
But more important is to think about why not simply what.
Why does it go wrong? Why are the regulators so ineffective and even in hindsight so stupid, and what can we arrange so that they do a better job next time? Why did the non-executives fail and what will stops them being sidelined?
Who measures how effective and diverse they are anywayeven given hindsight bias the “measure of effectiveness” is questionable.
After all it is only six or seven years since Fred Goodwin became Sir Fred and European Banker of the Year. I don’t suppose Her Majesty suggested ennoblement herself, the Chancellor, regulators etc. presumably had more of a say in it than she did. But I don’t notice Her Majesty or Prince Phillip talking about how greedy and stupid Fred Goodwin is, it is the same regulators, “experts” and commentators (like Robert Peston) who in retrospect are condemning him who were conspicuous by their adulation of him half a decade ago.
If we’re going to have a system that says “the man is a genius
, he makes massive profits for the country, he should be Knighted” and a few years later says he was “an idiot and taking too many risks”, we’ve not got a system that actually measures effectiveness very well going forward, have we?
But I’m not saying that regulators, politicians, bankers, Peston etc. are stupid
I’m saying that the human tendency is to look at the detail changes in “what and how”, not the strategic driving force of “why”.
In other words, the problem with all the post-hoc analysis, the hindsight bias, the attempts to change rules for the future etc. are that they are made with an absolute ignorance of motivation and human thought.
Human beings are pretty simple in motivational terms.
There’s stuff we like, that we try to get more of. There’s stuff we don’t like that we try to avoid.
We like things like status, security, power, freedom, love and friendship. And often we think (quite wrongly) that we can buy those with lots of money.
We don’t like things like pain, humiliation, blame, uncertainty, friendlessness and isolation.
Look at Sir Fred. If he was a “star”, he got money, status, power, security – pretty much the whole list. If it all went wrong he still got money, status, power, security – maybe he got some criticism too, but did he lose any money, was he at all uncertain what his future held (with £700,000 a year pension, he agreed to reduce it and take a lump sum payment) etc.?
Look at the non-executive Directors. They sit on a dozen or so boards and pick up half a million a year for attending a couple of meetings a month. Their CV looks good, they get status, money, are in with their friends. They have no responsibility (they are non-executive, they don’t run the company) and if it all goes wrong the worst that happens is they go to their friends and get another non-exec job with another company.
Look at the regulators. Lord Turner, when he was arguing on the Andrew Marr show for bonuses averaging 15 per cent for his approximate 2,500 staff, said “If you’re saying we should now cut the bonuses, you’re saying you should cut their pay by 15%. That’s the scale of our business pool. And that’s against the background where we’re being told by Vince or David Cameron or others that we need better people”.
So the regulators need “better people”. But although they’re trying to avoid the blame
Lord Turner said to Andrew Marr that, “there was a failure to focus on these systemic risks. And it was an intellectual failure”. And in the report “the FSA was too focused on conduct regulation at the time and its prudential supervision of major banks was inadequate”.
The regulator is saying that they need to do more “what and how” – so presumably they need even better people, who are paid even more.
But what is going to make them do a better job in future?
I’d suggest it is the same thing that will make the non-exes, the CEOs etc. do a better job.
It is taking the focus off the what and how, the details of the past, and looking at the bigger issue for the future of motivation, the “why” of behaviour.
That means rewarding actual value and holding people accountable.
Nobody is to blame (except people who have now taken up other non-exec posts, have £700,000 a year pension, are making and contributing to (and being paid for) BBC programmes about how the crash that they didn’t see coming was actually inevitable, etc.)
If there were consequences, in terms of painful stimulate (like humiliation, exclusion from public office or well-paid business roles, fines, prison sentences) and rewards that were linked to the effective conduct of business (lack of “near miss” financial brinkmanship, consistent lending policies, regular staff appraisal and appropriate compensation for prudence, initiative and “whistle blowing”) it would be a start.
The point is that looking back and fiddling with details of what and how has been shown repeatedly not to work.
It locks the doors of stables that are already empty. In future, the new horses kick their way out of a different exit, there is a wailing and gnashing of teeth, and a determination to fit better locks. And the pattern repeats again a few years (or decades) later.
The secret is to make the horses not want to run away.
You can lead a horse to water, you can’t make it drink, but you can salt its oats.
We need to think how we can salt (and potentially withhold) the oats.
We need to consider motivation, the why, not just what and how.
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