Decision Making in Banking — Professor Helga Drummond
“It is much easier to copy everyone else than conduct a rigorous independent analysis”
Professor Helga Drummond of the Liverpool University is interviewed by Martin Walker of CEBMa about herding behaviour in the bank’s decision making. She talks about the misconceptions about organisational culture, the reasons for herding behaviour and the tendency to only listen to the advice you want to hear.
Helga Drummond is Professor of Decision Sciences in the University of Liverpool Management School and Visiting Professor of Business, Gresham College London. Professor Drummond has published extensively both in article and book form for both academics and managers. Recent publications include “Academy of Management Perspectives”; “Journal of Information Technology” and “Economist Guide to Decision-Making.” She has previously lectured on the collapse of Barings’ bank and the lessons that can be learnt. This interview focused on the impact of “Herding Behaviour” in decision making. She has previously lectured on the collapse of Barings’ bank and the lessons that can be learnt.
Q. Chuck Prince the former Citigroup CEO is famously quoted in July 2007 as saying, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” A few months later he was forced to retire and in 2008 the US government had to bail out Citi with tens of billions of dollars of extra capital. Do you think the example of Citi and the broader banking sector leading up to the Great Financial Crisis was an example of “Herding Behaviour”?
Q. The former head of FX trading at Deutsche Bank (Kevin Rodgers) recently described how banks would adopt the same business strategy even when there was no evidence that the strategy worked. Do you think this “unthinking” type of herding behaviour is common in banking?
Q. What do you think causes this type of behaviour?
One explanation might be lazy decision-making. It is much easier to copy everyone else than conduct a rigorous independent analysis. I suspect, however, that the real reason is often psychological insecurity — even amongst the most highly educated and supposedly intelligent.
Q. Do you think there are particular types of ideas that are more likely to be copied without being questioned?
Good question! I would point to decision-difficulty. That is, probably the more uncertain the decision, the scantier the information the greater the temptation to herding.
Q. Do you think herd behaviour is damaging to the banks overall? Herd behaviour has in the past also encouraged the adoption of good ideas as well as bad, such as the ATM and Internet banking.
There is a world of difference between adopting proven approaches and technology than simply copying what everyone else is doing.
Q. Do you think that same behaviour is shown in attempting to fix problems as well as in taking risk? Some banks claim they are simply going to “fix their culture” which has been criticised because of the lack of an accepted definition of culture. Others claim technologies such as Blockchain will solve their cost problems, which has been criticised because of lack of clarity regarding how it will solve problems.
Herding can apply to any kind of behaviour. Industry standards and practices do not necessarily mean those standards and practices are adequate. One of the biggest risks banks (and customers) face lies in their computers. We have no idea whether existing safe guards are adequate. I suspect they are not. Who will be the first bank to break away from the herd and revert to using paper records as an additional safeguard?
As for culture, it is something an organization is rather than something it has. The latter misconception leads decision-makers’ to think it can be fixed — like a software patch. It probably can, to an extent, but real cultural change starts with a change at the top beginning with questions executives ask. For example, why can’t customers receive better protection against fraudsters?
Q. Do you think the people banks turn to for advice, such as the major consultancy firms, management gurus, or even academics, contribute to the problem?
Banks (like the rest of us) only listen to advice they want to hear. You also have to remember that advisors are retained more for their symbolic value than any substance they provide. They show that banks have the right attitudes towards risk and uncertainty, that is, they appear to value outside expertise. In reality, it is at least partly a sham as experts are adept at picking up the cues and telling clients what they want to hear.
There again, if a non-executive director (or advisor) is prepared to resign over an issue, that really is a warning light.
Q. In your book for The Economist on decision making, a great part of good decisions seemed to boil down to asking the right questions. How do you think regulators, shareholders and boards could encourage more critical thinking and less herd like behaviour?
Asking the questions or rather knowing the questions to ask is part of the art of decision-making. It is even more important though to have the patience and the energy to probe the answers. Ultimately, what matters though is what we do about the answers we receive.
This interview was first published in 2017