Whom to Blame for Excessive Risk-Taking?

Given the lameness of the bible of psychological diagnostics, the DSM, it’s pretty easy for the lay public to play armchair

extraversion + introversion

psychologist, particularly in the realm of organizational behavior. The Financial Times supplies an unadulterated dose tonight in the form of an article titled, Call in the nerds – finance is no place for extroverts.

Here’s the premise:

There is a compelling body of evidence suggesting that the people most likely to go into the riskier areas of financial services are precisely those least suited to judging risk. Susan Cain’s recently published book Quiet cites a series of studies that suggest that extroverts tend to be attracted to the high-reward environments of investment banking, deals and trading. And, troublingly, these outgoing people also tend to be less effective at balancing opportunity and risk than some of their more introverted peers.

Ms Cain tells the story of Vincent Kaminski to show what can happen to a business when

aggressive risk-takers enjoy too high a status relative to more cautious introverts. Mr Kaminski served as managing director of research for Enron, the energy company that filed for bankruptcy in 2001. In that role, he repeatedly tried to sound the alarm about the company entering into business deals that, he thought, threatened its survival. When his superiors would not listen, he refused to sign off on these transactions. The consequence? He was stripped of his power to review company-wide deals.

As the financial crisis began to flower in 2007, Mr Kaminski was interviewed by the Washington Post. He warned that the “demons of Enron” had not been exorcised. In particular, he complained that many who understood the risks that the US banks were taking were ignored because of their personality style. He said: “The problem is that, on one side, you have a rainmaker who is making lots of money for the company and is treated like a superstar, and on the other side you have an introverted nerd. So who do you think wins?”

One problem, as with our previous discussions on introversion and extroversion, is that the way behaviors line up with the types often isn’t all that neat and tidy. Risk/thrill seekers are likely on the whole extroverted, but not all extroverts are risk-mongers.

But the bigger problem with the thesis is right there in the extract. Notice what Kaminsky asserts: “You have a rainmaker….” and the assumption is the rainmaker is necessarily an extrovert. At least in investment banking, that’s hardly the case. In fact, it’s critical to subordinate your ego (or at least appear to) to that of the senior client executive. Back when I was a kid on Wall Street, the most macho area of investment banking, M&A, had partners who were more nose to the grindstone and technical nerds because M&A had a lot more technical nerdy stuff than corporate finance. Oh, and far fewer guys who were divorced. There were also big producers at McKinsey who were a bit flamboyant, but there were also some extremely successful partners who were almost certainly introverts who could nevertheless muster up the needed level of sociability to do the job.

But there is a particular type of rainmaker pathology that Kaminsky isn’t wrong to call out. I called it “the big producer syndrome” and wrote about it more than a decade ago. It takes place when you get someone in a revenue generating position who is producing lots of money and no one wants to question why. If it’s an unprecedented amount of money, it may well be because he’s bending rules or even laws. From the Australian Financial Review:

We’ll look at one manifestation, which we’ll call the big producer syndrome: when an individual or unit that performs impressively is not monitored as closely as it should be.

Ironically, pathological big producers tend to surface in organisations that have admirable qualities: they’re results-oriented, entrepreneurial, flexible. But these attributes, taken to excess, do great harm.

Financial services, which gives generous rewards and considerable latitude to capable employees, provides many examples of this phenomenon. They include Credit Suisse First Boston’s Frank Quattrone, recently suspended for allegedly ordering the destruction of documents in an SEC investigation, and whose technology group was virtually a firm within a firm.

Barings’ Nick Leeson and Kidder Peabody’s Joseph Jett were both traders who exploited accounting weaknesses and whose actions led to the demise of their firms.

And the list of internet analysts who touted dubious businesses is long. In all of these cases management was well aware of the outsize profits generated and decided not to probe.

Any business that offers freedom to deliver results and rewards production is at risk. Many professional services firms, for example, have a partner or two whose work product or professional conduct is not up to scratch, but who is nevertheless considered valuable because he controls a large book of business.

In other words, this problem is hardly new. And that means, gasp, that executives need to do their job and manage

against it! Of course, in too many cases, the top brass is part of the problem. It’s either happy not to know too much if they can profess to have been adequately cautious and can hang the perp out to dry if anything dodgy surfaces, or they are actively promoting the bad behavior. It’s perverse to see the FT author Sarah Gordon parrot Kaminsky on “gee, no one up the line cared.” Did he miss the fact that Jeff Skilling was CEO? Skilling had been a partner at McKinsey. At a partners’ alumni meeting, someone asked how many people had worked with Skilling. About 1/3 of the hands in the room went up. The same person asked how many people were surprised that Skilling was involved in something that didn’t pass the smell test. Not a single hand went up.

Now this discussion is no doubt a bit quaint the more that the ethic of “might and money make right” seems to become more firmly embedded in the Anglo-Saxon business world. But there’s an end of paradigm feel in the air, as if we are nearing the point where predatory practices arng to do enough damage to the fabric of commerce that raw self interest will start forcing changes. But “nearing the point” could still be a frustratingly long number of years away. The fact that the FT is pointing out the need for more checks, this is the form of having more cautious types in the mix, is hopefully a harbinger rather than a false positive.

  source : naked capitalism

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