How could so many smart people have been so stupid? The Nyberg banking report hints at an answer - we are hard-wired to act stupidly when we act together.
Our business, banking, public administration and political leadership failed abysmally to act on warning signals. Influential journalists and analysts acted as gate-keepers of a cosy consensus by not appreciating the warnings signs that all was not well. No one wanted to take the punch bowl away during the party as the rule of thumb “safe as houses” prevailed.
It’s not surprising. With limited computational skills and seriously flawed memories we create rules of thumb to get by and we use recent experiences to create them. As we do so, we underestimate risks and overestimate good results.
We use language to craft compelling stories which in turn dictate our actions and reactions to news. We selectively hear only what we recognise, interpret it based on past views and draw conclusions much like those drawn before. We become immune to contradictory information that tells us we are wrong to continue doing what we are doing. Together we all herd in the one direction, to a blind spot we hardly realise exists. What’s more, senior decision makers have known of these shortcomings for years.
The Nyberg banking report mentions one well known shortcoming, “groupthink”, twenty nine times. It happens when a group makes faulty decisions because group pressures lead to a deterioration of “mental efficiency, reality testing and moral judgement”. It causes amongst other things; an illusion of invulnerability which creates an excessive optimism that encourages taking extreme risks; a collective rationalisation where assumptions are not critically examined and dangers are discounted; a belief in inherent morality, where groups believing in the righteousness of their cause, ignore the ethical or moral consequences of their decisions; pressure on dissenters not to express arguments against any of the group’s views; self-censorship where personal doubts are not expressed and self-appointed “mindguards”, others who protect the group from information that is contradictory to their consensus.
Nyberg highlights symptoms such as “the pervasive assumption of continuing growth”, “failure to see growing indebtedness as a serious policy problem” “the soft landing scenario” and “unwillingness to recognise the existence of long-standing problems in some banks”. He appears to vindicate the banking guarantee decision makers as they couldn’t have known of the true extent of banking failure.
Yet the crisis was made worse by one of the most stupid groupthink decisions ever made. Good leaders guard against the dangers of groupthink by including for diverse views, testing assumptions and enquiring into alternatives when reaching decisions. The guarantee decision makers should have realised the extent of their collective blind spot. They should have realised they were suffering from groupthink and acted to guard against it.
Nyberg hints at people’s leadership culpability for not asking the hard questions when they had doubts. Some may have seen that a new reality was emerging. Some may have seen their own part in maintaining the fiction of riskless banking. Yet they did nothing. There is no more damning indictment of bad leadership than to see there is a problem and do nothing.
In all crises there are three distinct positions that can be heard. Some say “let’s return to the order of the past”. Others say “let’s just keep doing more of the same and muddle through”. Others ask “is there a way to break the patterns of the past?”
Nyberg proposes breaking from the patterns by removing the threat and danger of groupthink. Banks should no longer be too big to bail out and should have narrower mandates than before. Rules should be used to limit their risk taking and act as a break on excessive optimism.
But is there a risk that a new form of groupthink will take hold as political populism dictates a new orthodoxy? Could state owned and directed banks become excessively risk adverse, unwilling to lend at all?
The Nyberg report should signal the start of a proper dialogue on the design of the new banking system. The danger is it will be used as the excuse to ignore the lessons and blame the past on people who inhabited the past. Yet many of those who bought into groupthink consensus have been promoted to higher levels of influence and authority without being required to publically account for their behaviours and actions.
One wonders if within current leadership a new groupthink is emerging. One that insists banks are made whole without equitably and morally forcing losses where they lie.
Today is seems gatekeepers are protecting the bank bondholders who bought into the groupthink consensus, willingly ran with the herd and now expect a free lunch.
A version of this article appeared in the Irish Examiner, Business Edition, Monday 25th April 2011
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