Risk, reward, crash

Barings Bank, a British institution that was over 200 years old was brought down almost overnight in 1995 by poor investments. A lack of control and oversight were cited as reasons for the dissolution of the world’s second oldest investment bank. The protagonist was one individual who conducted unauthorised trades and was able to cover his tracks until too late.

The regulator at the time stated: “It seems to me that Mr. Leeson pulled the trigger," he said on the BBC's Panorama interview program. "But the bank gave him the gun and the bank gave him the ammunition, and when he wanted more ammunition they gave him as much as they could give him until they ran out, and then the bank was bust."

A number of factors contributed to the event but it was catalyzed by the thought process and values of one individual.

In the financial markets this is just one example a number of very high profile, multi-billion dollar institutions have been driven to the brink (and sometimes over) of existence by the actions of individuals.

So what causes an individual to make poor decisions, to take so much risk?

A major influence in all decisions that we make are our values. It could be referred to as the DNA of our decision process. Effectively hard wired by nature and nurture, driving every action and the way we behave in all circumstances.

Traders need to be risk-takers and have huge personal conviction in the positions that they are prepared to take - classic risk and reward. The paradox being that you want performance but you don't want them to break the ban!. The problem is the Values you need to get performance are also those that often mean 'no limits'.

Trading floors have a very sophisticated set of risk controls and the strongest institutions have robust risk management processes; the vast majority of which are reactive. The largest trades are put on the market by individuals with split seconds to react to market news and events.

Putting bureaucracy in front of that decision process can cut a banks profits significantly. Therefore by the nature of the business, there is almost no preventative risk management to stop a trader entering the market. There are system led limits for the initial transaction, but with the complexity of the multi strand derivatives put on by proprietary desks; the loss can far outweigh the initial capital outlay. This is also assuming the trader in question is honest and doesn’t enter trades he or she shouldn’t.

The ideal risk management approach therefore is to ensure that the decision frame of the individual is driven by a set of values that reflects the bank’s risk appetite, and this is where Cultural Dynamics can enter the picture. A series of questions can define the drives and motivations, and subsequent decision-making, of the person being put in charge of deploying the bank’s capital. Some riskier funds may want someone to take greater risk, to pursue an ‘edgy route’ in transacting. I would hazard a guess that the world’s second oldest investment bank would much rather have understood the decision process of the person who put on a bet bigger than the balance sheet, and turned a multi-billion bank, into a company that eventually was valued and sold for one pound.

Can understanding the values of your staff guarantee you against someone ‘pulling the trigger’ ? No. Can they be used to predict the probability of bank busting behaviour? Yes. Values data can help you to understand the mosaic of individuals that comprise a company, to predict where extra controls are required to manage and mitigate known risk takers. Utilizing values will also help you in the initial selection, which will enable you to appoint the right people to the right roles.


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Tel: 403-404-1042

Calgary, Alberta, Canada