Monday, May 3, 2010

A Dog Trainer Explains the Financial Crisis

OK, so here goes...

As I mentioned last post, behavior scientists have pretty well figured out that you can encourage a particular behavior by rewarding it. Go figure. Dog sits, you give it a treat, and dog is likely to sit again. Big financial corporations, as far as I can tell, have figured out the same principle. Banker-type makes money for the company, and the company gives Banker-type extra money as a reward, to encourage making more money. All very sound. You can think of it as training Fat Cats, rather than dogs. (Oh, and by the way, these training principles work just as well with cats as with dogs. Don't believe me? Come over and I'll have my cat do tricks for you. Of course, they also apply to chimps, horses, llamas, dolphins, fish and people. That's the point.)

Sorry...where were we? Oh yes, Fat Cats getting money for making money. OK, so where's the problem? Goldman Sachs, say, rewards folks for making money by giving them money. Success is rewarded -- capitalism at its finest. But here's the thing. The law of behavior says that you get what you reward. What you reward, not your idea of what you're rewarding. Say you have a dog that barks in an annoying fashion. Every time that dog barks, you yell at it. Well, if the dog happens to enjoy the fact that now both of you are yelling together, then you have rewarded the dog for barking by joining in on its yapping. Then you get both more yapping and a sore throat.

But making money is a good thing, right? That's what financial institutions are for is making money. Where's the problem with that?'s the thing. Legitimate businesses provide goods and/or services. Investment banks are supposed to make money for their investors. Business that just make money for themselves, without providing any goods or services in exchange, are known as things like Ponzi schemes, counterfeiters and bank heists. Bernie Madoff for sure had one these kinds of businesses. Financial institutions were rewarding people not for making money for the customers, but for making money for the bank. So Goldman Sachs (for instance), sold financial instruments to customers, knowing that they were likely to end up worthless, and then bet in the markets that those financial instruments would tank. So the bank made money, the bankers made money and the investors (and the rest of us who have been affected by this economic mess) lost out. The bankers were rewarded for making money, so they made money -- by essentially lying and cheating. Mortgage brokers were rewarded for selling mortgages. Not for helping people to get appropriate mortgages that would make it possible for them to own homes over time. Brokers were rewarded for selling mortgages, and the bigger the mortgages the bigger the reward. Until it turned out that people couldn't pay the mortgages that they'd taken out, and the whole company (say, Countrywide) collapsed, along with the housing market. Ultimately, making money by making money is not sustainable.

What if, instead, businesses had clearly and publicly articulated missions (which I presume they do), and they figured out a way to reward people for advancing the overall mission of the business? Better yet, what if bonuses were tied to particular innovations that led to measurably better performance in particular facets of the business's mission? (More on this distinction later.)

Here is my assertion #1: You get what you reward, so you should be pretty damn careful about what exactly it is that you are rewarding.

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