Given the lameness of the bible of psychological diagnostics, the DSM, it’s pretty easy for the lay public to play armchair 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 are going 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.
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It was all described years ago in “Yes Prime Minister”:
Sir Desmond Glazebrook: They’ve broken the rules.
Sir Humphrey: What, you mean the insider trading regulations?
Sir Desmond Glazebrook: No.
Sir Humphrey: Oh. Well, that’s one relief.
Sir Desmond Glazebrook: I mean of course they’ve broken those, but they’ve broken the basic, the basic rule of the City.
Sir Humphrey: I didn’t know there were any.
Sir Desmond Glazebrook: Just the one. If you’re incompetent you have to be honest, and if you’re crooked you have to be clever. See, if you’re honest, then when you make a pig’s breakfast of things the chaps rally round and help you out.
Sir Humphrey: If you’re crooked?
Sir Desmond Glazebrook: Well, if you’re making good profits for them, chaps don’t start asking questions; they’re not stupid. Well, not that stupid.
Sir Humphrey: So the ideal is a firm which is honest and clever.
Sir Desmond Glazebrook: Yes. Let me know if you ever come across one, won’t you.
Over the last couple of decades, perma-optimism has been a must to get promotions, either you had it, faked it or were left behind.
The big bucks have been in sales, so the focus has not really been on bettering systems but on adding doodads and selling fridges to eskimos.
Externalities have not been incorporated in business models and an incredible number of companies depend on infrastructure supplied by government to offer their products and services… we’re close to hitting a wall where these firms will have to start paying the true cost of the inputs they need and this will change business models.
On top of this, models are based on ROIs which are still very high. As the boomers retire and take contracts here and there to increase monthly cash flows, they will probably affect the big boxes business models as these retirees will not be working on a ROI but a cash flow basis.
Change is coming but it will probably going to be very gradual and happen over 1 or 2 decades.
For example, here in Canada, government is cutting services and hours here and there, and companies that depend on these are being ask to pay if they want longer hours. Of course, they don’t realize that their business model was based on unsustainable government services… when corporate taxes go from 35% to less than 20% but the underlying system does not change, what can they expect?
Moneta:
“Externalities have not been incorporated in business models and an incredible number of companies depend on infrastructure supplied by government to offer their products and services… we’re close to hitting a wall where these firms will have to start paying the true cost of the inputs they need and this will change business models. . . .
“For example, here in Canada, government is cutting services and hours here and there, and companies that depend on these are being ask to pay if they want longer hours. Of course, they don’t realize that their business model was based on unsustainable government services… when corporate taxes go from 35% to less than 20% but the underlying system does not change, what can they expect?”
Well, that sounds like a wake-up call. :)
But what is wrong with gov’t providing infrastructure and other services? In the past couple of hundred years, haven’t gov’ts subsidized their economies?
The wall is political and psychological. People used to believe in public works, and they can do so again. Canada has its own currency. It can afford to provide infrastructure.
Canada’s currency is backed by oil reserves. Without having something that has almost universal demand worldwide to export, Canada’s ability to conduct infrastructure projects would be limited.
“But what is wrong with gov’t providing infrastructure and other services? In the past couple of hundred years, haven’t gov’ts subsidized their economies? ” Infrastructure is very expensive. Only a few wealthy industrialized countries have had well-developed infrastructure. A lot of that wealth came from access to fossil fuels. As the competition for dwindling fossil fuel supplies intensifies, infrastructure will become more and more expensive, and the increasing cost will turn off the public in greater numbers.
The whole philosophy of “well, they have their own currency so they can afford whatever they want” shows a lack of understanding of economics. There is a reason why some countries can afford expensive infrastructure while most cannot. Hint: the reason why most countries don’t have expensive and extensive infrastructure isn’t because they don’t ‘print money.’
If we keep on consuming our resources we:
1. have less to export
2. increase the entropy… meaning we need an increasing amount of energy just to keep up.
If we export less, we can import less… that would be a shock for Canadians who barely produce anything for consumer consumption and, over the last decade, have become addicted to their imported cars and luxury everything.
None of those things can really work if the root of our economic problems is human overpopulation.
This phenomenon isn’t new. I witnessed it first hand in a law firm that started as a 20 something person boutique dedicated to sharp practice in 1968, mushroomed to become one of the largest firms in the country by the mid Eighties, and then imploded in a spectacular bankruptcy. A friend and I saw it all coming and quit….in 1970.
Very few people seem to understand that organized crime differs from large scale business, law, consulting and accounting primarily in the tailoring of the participants. Large scale profit engines are organized to bring scum to the top.
An informative and amusingly-written read about psychopathy is The Wisdom of Psychopaths: What Saints, Spies, and Serial Killers Can Teach Us About Success (http://amzn.to/11EZ1px) by the British psychologist Kevin Dutton; it was published last year. He describes psychopathy in terms of the NEO personality inventory test, in which “extraversion” (author’s spelling; is this a British thing?) is one of the “Big Five” super categories. The other four are: Openness to Experience; Conscientiousness; Agreeableness; and Neuroticism. The test rates each of these with about a half dozen sub-categories, which for Extraversion are: Warmth; Gregariousness; Assertiveness; Excitement Seeking; and Positive Emotions. Dutton cites research that suggest psychopaths rate high on Assertiveness and Excitement Seeking, and low on Warmth and Positive Emotions.
Tha author argues that psychopathy should be seen as more of a circular spectrum as opposed to a linear one. In other words, there is a fine line between the ruthless criminal and many a super-achieving non-criminal, especially in careers such as law, finance, surgery and politics. Dutton also cites a study wherein the NEO test was applied at a historical distance to past US presidents. At the top of the list are Clinton and Kennedy. A summary of these findings can be found here on the author’s website:
http://wisdomofpsychopaths.com/psychopathy-presidents.html
Today at Science Daily: Psychopaths Are Not Neurally Equipped to Have Concern for Others
From my perspective as a lay person, this classification seemed overly broad and exclusionary. Observations, while interesting and raising possibilities, were insufficiently supported and perhaps a bit down the road of cognitive bias IMO.
Now “ancient Myers-Briggs” studies categorize a broad range of personality types. In addition to whether a person tends toward being an extrovert or introvert, there are other personality characteristics that can also play a role, and this largely ignores different forms of human intelligence, Robert Hare’s work, motivations, etc.
Without getting into the Whys and Wherefores, there may also be some other factors in play that at first blush are “Outside the Box”, such as that mentioned in this recent article from the Telegraph: http://www.telegraph.co.uk/finance/financialcrisis/9993266/Financial-crisis-caused-by-too-many-bankers-taking-cocaine-says-former-drugs-tsar.html
Thank you for an interesting post, though. Definitely food for thought.
We don’t like to get too heavy-handed about morality. “It was immoral, but it wasn’t illegal.” Translation: you cannot prosecute criminally but you can take them to civil court for damages. Somehow we really don’t want to kill off our risk-taking immorality. So if we want to hang on to it (even as an unconscious decision) we should at least have a justice system that provides us with compensation in a timely manner. That will tame a few of us.
Critical psychology has trouble with the term ‘personality’ itself. We forget its a fiction too easily. I’m inclined to stick with Scott Adam’s (Dilbert) statement that it’s impossible to tell a risk taker from a moron a lot of the time. On critical psychology I’d recommend anything by Ian Parker.
Modern brain science (there is a putative neuroeconomics)has decision making associated with ambiguity and hormone flows in interaction with the ‘clues’ we pick up from others and our environment.
Long before we look into fictions like personality (and we do – psychopaths have poor connections between different processing areas of the brain) in respect of risk taking we should do some deconstruction on what we mean by “risk taking”. The general definition is bound up with the whole myth of banksters being worth their massive salaries and bonus arrangements – i.e. risk taking is a good thing and a mega-scarce “talent”. Lemmings take great risks when hurling themselves off cliffs (the life history of these events is complex and not mass suicide). Mostly, we train risk out of people like train and plane drivers.
The rich may be extremely risk averse – after all, they feather their nests against contingencies that might starve the rest of us. Workers, not employers go hungry in strike action. Most of us who teach have surely come across “extrovert” students who can’t say beep in class. Years ago at Lancaster we were sure the privately educated 35% spoke up much more readily – we called them ‘the Yahs’ – suggesting this was a taught behaviour.
I assume most of us would steal bread if starving. Rwanda before the genocide had many ‘hunger thieves’. We take risks in context – playing catch-up rugby when losing by enough with the clock running down hoping to pass the miracle ball or produce broken-field situations from the up-and-under (Hail Mary). We train players not to do this stuff in ordinary play and stick to the percentage game plan.
The DMS has merits. However, the formula for nitro glycerin is simple enough but you’ll blow yourself up without a lot of extra skill. I’m not falling, at this stage, for the idea bankster-gambling is about risk taking at all. Fraud is cheating because you can’t hack playing by the rules with a bit of gaming at the edges – perhaps even can’t take the risk of direct showtime at all.
Psychopaths are profoundly uninteresting. We study them for clues to stop crime and the horrors inflicted on victims. Only our idiot literature makes them an entertainment focus. We should beware of this in considering the banksters. The super-bright, super-wonders have come up with nothing of intellectual merit between them, yet are so ‘indispensable’ the sky would fall without them? Paranoid narcissism might be the place to start.
In a word, “No.” I agree with Chauncey. The problem is White Punks on Dope
The Tubes: http://www.youtube.com/watch?v=kP8nGNbk7oQ
Big money boys boast of being on modafinil: http://snipurl.com/26qwix1
Among the possible long-term effects of abusing narcolepsy medications for “hyper-awareness” are paranoia, impaired decision-making, and sociopathic tendencies. This is essentially self-imposed sleep deprivation, which the Abu Ghraib report established makes people certifiably insane.
Harvard and Princeton grads dominate the FIRE sector: http://snipurl.com/26qxhb7
Now we know they’re all white (and occasionally Asian) punks on dope like the MOU’s who brought us the 80’s, but this time with far greater scope to sacrifice millions to their sleep-deprived delusions and little or no accountability, thanks to “big producer syndrome” and the best government money can buy.
Great Post Yves!
A relevant set of predictive categories distinctly different from extroversion and introversion are suggested by regulatory focus theory. Promotion focus and prevention focus concern individuals’ values, motives and goal strategies. Promotion focused individuals primarily value achievement while prevention focused individuals primarily value security and risk avoidance. This classification captures the issue that seems to involve devil-may-care risk taking compared to more cautious approaches.
Related to this classification is a classification developed by my coauthors and myself in a working paper that investigates individuals’ different perception of power. Some individuals perceive power to involve controlling others (might makes right) while others perceive power to involve being responsible to others (the golden rule, do unto others as you would have them do unto you).
The two classifications above are useful when analyzing risk-taking and malfeasance. In addition, on an organizational level I would include research concerning norms of sweeping malfeasance under the carpet, organizational “fixers,” and censoring whistleblowers. On a societal level, Yves predicts a paradigm shift. I suggest the shift may tilt the pendulum away from purely self-interested, social darwinist competition towards cooperation and mutual aid.
Thank you Yves!
It isn’t just extraversion. There are genes for taking high risks. That’s probably socially beneficial, as long as the risks the high risk takers take are theirs and not ours.
““extraversion” (author’s spelling; is this a British thing?)”
No, it is correct spelling, from the Latin. “Intro-” and “extra-“. :)
“But there’s an end of paradigm feel in the air, as if we are nearing the point where predatory practices are going to do enough damage to the fabric of commerce that raw self-interest will start forcing change.”
I couldn’t agree more with the sense that there is an end of paradigm feel in the air—but a key question then becomes which paradigm is possibly nearing an end—capitalism, the nation-state, or possibly the culture created by the gradual merger of capitalism with the nation-state over the past 400 or so years?
Could it be that such a culture, initiated by the evolution and increasing bureaucratic complexity of the modern nation-state (especially in the US, UK, France, Germany and Italy) has entered a terminal phase?
Could it be that modern Western culture itself is driving us mad?
For example, Liah Greenfeld in her recent “Mind, Modernity and Madness” (just published) argues that the psychological price of national values like equality, liberty and choice has contributed, over the past 400 years, to increasing depression, manic-depressive behavior and schizophrenia.
Could it be that the drive for a new type of neo-feudalism has its origins not simply in economic doctrine but in an increasingly generalized anomie (absence of cultural guidance) that causes increasing problems of personal identity formation, creating in turn, on an individual level, psychological support for a more circumscribed role in society– resulting in what we seem to be experiencing today–the gradual elimination of choice and freedom with, at this point, only minimal resistance.
Perhaps the Marx of the 1844 manuscripts was really trying to diagnose our modern mental deterioration?
I preferred Theodore Rozak’s ‘Flicker’ – we go zombie on the basis of hidden effects planted in film by a Cathar sect. One could write-up the banksters as going mad as they realise there is no need for the work they do, or perhaps as ants that come to know they are working for rubber-masked aliens and crashed the financial system to signal this to the rest of the species!
It’s the end of “liberalism” as we (especially Americans!) think we know it, (and I feel f-i-i-i-i-ne).
http://www.youtube.com/watch?v=Z0GFRcFm-aY
Myers-Briggs Type Indicator will tell you about attributes—such as your degree of introversion or extroversion, or your reliance on thinking versus feeling—that indicate what you like to do, but they tell you very little about whether you are good at it, or how to improve if you’re not. But one interesting facet of Myers-Briggs (and similar tests) is that it reveals that your degree of “extrovertness” (extroversion) and introvertness” (introversion) can be different in different domains.
It’s when specific-domain risk takers (say a professional gambler at a casino – where the risk to the casino are understood and “mitigated“ either by policy or process) transfers the personality of risk taking to another domain (say working for a pension fund) for which there are fewer appropriate risk mitigation mechanisms for that type of risk taker (gambler). So, arguably, there are typically, domain-specific and trans-domain risk taking, and a relationship between personality and risk taking.
In short , risk behavior is patterned and is influenced by a combination of general factors, including age, sex and several personality characteristics, notably sensation seeking and value openness (sharing ones values and the values of others); characterized by (The Big Five): High Extraversion, Extraversion, Neuroticism, Agreeableness and Conscientiousness. High Extraversion (especially sensation-seeking) and Extraversion supply the motivational force, Low Neuroticism and Agreeableness supply the insulation against concern about negative consequences, and low Conscientiousness lowers the cognitive barriers.
Leading to three, principal types:
The Romans: A personality with High Extroversion/Extraversion and low Conscientiousness take risks in order to reap some psychological or material benefit, not for the sake of the risk itself.
The Plebs: People with high Conscientiousness will pursue these benefits through disciplined striving rather than risk taking.
The Vandals: People with low Conscientiousness can be seen as attempting to “get rich quick” – secure benefits by taking chances rather than controlled effort.
The domains of Investment Banking and Brokerage typically wanted Romans, where the mitigation of risks to the business and it’s customers through policy process and technology was written for these personality types the (as Yves often reminds us) pro-typical Wall St Banker of yesteryear; personality-domain specific (“a gentleman’s’ understanding”, “it’s a club”, “we don’t do it that way here at …..”).
But, as banking, investment and brokerage has become increasing retail; as investments have become increasingly main street, so the domains have merged. Rome has moved towards the Vandals; but it has been the Vandals that have invaded Rome, and have found a domain where the domain rules are quaint and defy their situational logic – money is there, it‘s there for the taking, so why is no one taking it all, today? The Vandal’s own domain of harsh societal rules and laws aimed at deterring ( and mitigating) the”get quick rich” (rob a bank) mentality doesn’t translate inside the Citadel of Wall Street – it‘s easy to rob a bank, an investment house a brokerage, or a mortgage company, especially if you own one (Bill Black).
Only when Rome is burning, will the Vandals retreat.