Looking for LORA – Lessons From The Great Recession by Bill Dahl

The Dahl Street Journal

In his book, Thinking, Fast and Slow, Nobel Prize winner in economics, Dan Kahneman from Princeton says the “concept of loss aversion (hereinafter ‘LA’) is certainly the most significant contribution of psychology to behavioral economics.”[1] This article explores what I refer to as the loss of risk aversion (or ‘LORA’) that is now a well-documented, fundamental, historical reality. LORA was essential to the precipitation and enormity of the bubble economy in the U.S. during the run-up to the economic implosion we experienced beginning in 2007. In this article, I will examine both the issue of LORA and address what can be done about it.”

In their classic work, Manias, Panics and Crashes – A History of Financial Crises, Kindleberger and Aliber write: “in periods of economic euphoria the quantity of debt increases because the lenders and investors become less risk averse and become more willing – or less unwilling – to make loans that had previously seemed too risky.” [2] In the U.S. we have a penchant for moving on – leaving the past in the past as quickly as possible (particularly when the period in question is an economic downturn of historical proportions). Yet, as former Fed Chairman Bernanke has said; “obviously the last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the economy and there is no doubt that as we emerge from the financial crisis, we will all be looking at that issue and what can be done about it.” [3]

I.   Losing LORA – A First-Hand Experience:

What happens when we ‘lose our LORA’ (loss of risk aversion)? Allow me to share an example from recent, first-hand experience.

I became employed by a regional community bank in February 2007. This particular bank had been an FDIC insured depository institution since 1977. It was considered to be one of the largest regional banks in the Pacific Northwest region of the FDIC. The bank was publicly traded on NASDAQ and had been profitable for at least the last several years. At its zenith during 2004, the stock traded at a high of $37.49 a share. Stockholder equity was in excess of $90MM, and market capitalization was in north of $250MM – at the end of Q-4 2004.[4] The stock traded at $23.82 a share on the initial day of my employment. The bank was represented to be growing rapidly in February 2007.

After several weeks of poring over the commercial loan portfolio that had been assigned to me, I was prepared to engage in a discussion with my supervisor about it. I recall my first two questions, as I grabbed the first credit file off the top of the stacks on my desk and asked: “May I ask you something? Why are we doing this deal?” For the next three years, I was on the front lines of a desperate battle to attempt to extract this bank out of the cumulative effects of years of poor decision making. On Friday January 22, 2010 around 5:30PM, this bank was declared closed by the Oregon Department of Finance and Corporate Securities (ODFCS), the FDIC appointed as receiver, and was sold to an acquirer – with no interruption in operations. This outcome remains the largest bank failure in the history of the state of Oregon.

In September 2010, The FDIC’s Office of the Inspector General released a report that relied upon a post-mortem audit conducted by KPMG, LLP and served as an in-depth review of this specific bank failure. Excerpts from this report are poignant as they speak directly toward LORA:

“total assets at closing were $947.3 million and the estimated loss to the FDIC’s Deposit Insurance Fund (DIF) was $161.1 million…management and Board failed to properly identify, measure, monitor, control, and mitigate growing risks… Examiners noted a lack of executive attention to compel the Board to shift the bank’s focus from a production mode to protecting the bank’s assets…Credit administration weaknesses were a significant factor in the bank’s failure. Insufficient loan reviews, an inappropriate Allowance for Loan and Lease Losses (ALLL) methodology that did not adequately reflect the risk of the portfolio”… credit grading practices were not effective, as evidenced by the large number of loans that were downgraded from the bank’s internal grade or where additional impairment was identified during the examination. The credit review process had not been effective in identifying deterioration in the loan portfolio…by January 2010, Tier 1 Capital Ratio had dropped below 2 percent of assets and the bank was determined to be critically undercapitalized… Adversely classified items had grown from $25.2 million at the July 2007 examination to $150.4 million at the August 2008 examination, and totaled $177.7 million as of May 2009, based largely upon internal risk ratings. Adversely classified assets represented an excessive 17 percent of total assets and approximately 200 percent of Tier 1 Capital plus the ALLL…” [5]

II.  The Costly Lessons of LORA:

The U.S. has a long history of economic crises. During the S&L Crisis from 1989 to 1995, the FSLIC and the RTC closed a total of 1,043 thrifts in the U.S. that held $519 billion in assets.[6] The effective cost of these failures has been estimated at $153 billion. [7] Most recently, the period from 2007-2011 included more than 400 bank failures in the U.S. [8] As a point of comparison, the decade from 1996 to 2006, the total was 46. [9] When one examines solely the FDIC’s cost for these failures for the period 2007-2011, it is $88 billion vs. $44 billion for the 828 bank failures during 1990, 91 and 92. [10] The total costs for the Great Recession are estimated (estimates vary) around U.S. $5.9 trillion. This history is the result of human error.

Our track record speaks for itself. We are not learning from past mistakes. In fact, the absence of changes in our economic behavior has become drastically more costly. Why? Several plausible reasons come to mind; a) the human tendency to assign blame to institutions, organizations and legitimately disreputable actors. Already overdrawn from surviving or attempting to survive the most recent onslaught of economic calamity, we use the energy we have left cuddling up to comfortable notions of causation and accountability. Although intellectually and emotionally comforting, we fail to learn. We choose instead, a convenient adaptive response; the art of blaming. b) Resistance to change. To truly demonstrate that we have learned from our economic history, the actions of economic actors must change, as evidenced by our ability to avoid similar outcomes in the future. To attribute sunburn to the sun today is as absurd as attributing the sole cause of the economic behavior of man to something or someone outside of our selves.  c) Humans don’t like to experience regret and shame – particularly when we have been designers/actors/victims/perpetrators in a deception or collateral damage to an illusion. We must change the results of our own behavior by applying the most recent scientific evidence at hand, which distinctly alters our behavior as we navigate during the heat of the day within the economic environment around us. When a Nobel Prize winner in economics says (2011): the concept of loss aversion (hereinafter ‘LA’) is certainly the most significant contribution of psychology to behavioral economics[11] – perhaps it’s time to intentionally turn our attention to this reality.

Our most recent experience, The Great Recession, has been described as the result of reckless endangerment – the result of unfettered risk taking [12] – the period of LORA. Yet, LORA is a human disorder. The Great Recession has been termed a human drama – one that has aptly demonstrated the fallibility of people.[13] LORA infects the minds of real people – impairing the decision-making capacity of economic man. LORA is viral – it can be transmitted from one person to another. LORA is prone to contagion – as a review of the past two to three decades of our history suggests.

If the costly lessons of LORA have taught us anything, it is that there is an abundant opportunity for improvement. We have tremendous unactualized potential. The truly good news for our future is emanating from what scientists have/are discovering about the way the human mind actually works; “the new science suggests that few of us know our true limits, that the vast majority of us have not even come close to tapping what scientists call our “unactualized potential.”[14] However, to experience this unactualized potential, we simply cannot continue into the future with the same mindset that produced the results of our recent past.

III.   Who Do You Think You Are? – Where’s LORA?

If you’re searching for something you’ve lost, it makes sense to return to where you’ve been.

It has been said that “The shock of reality brings with it the terrible realization that we are not who we thought we were.”[15] Yes, the bubble economy implosion in the U.S. actually was the result of ideas, thoughts, and the malfunctioning of the human mind. Economists George Akerloff and Robert Schiller have saidwe must pay attention to the thought patterns that animate people’s ideas and feelings”… even in the arena of important economic events that occur within human civilization  “their causes are largely mental in nature.” [16] Thoughts, ideas, beliefs, assumptions, feelings, tendencies, plans, patterns paradigms, worldviews, myths, illusions and behavior cannot arise or survive without a human host. LORA lives in our minds. It is here where we must begin our search.

Remember: Economics is a social science. The contributions of recent research to our applied understanding of how the human mind works are paramount to the future results produced by those involved in the financial services industry. Author David Brooks shares the following observation regarding this imperative: “We are living in the middle of a revolution in consciousness. Over the past few years, geneticists, neuroscientists, psychologists, sociologists, economists, anthropologists, and others have made great strides in understanding the building blocks of human flourishing. And a core finding of their work is that we are not primarily the products of our conscious thinking. We are primarily the products of thinking that happens below the level of awareness.” [17] Brooks calls for epistemological modesty. He refers to it as both an awareness and an attitude. As awareness, Brooks says is the knowledge of how little we know and can know. As an attitude, it is built on the awareness that we don’t know ourselves.[18] An approach to life that acknowledges “We cannot delude ourselves that our knowledge is further along than it actually is.” [19] Looking for LORA requires the right attitudinal approach before we embark on an active search. It requires a humble confession that we have much more to learn, we have much to unlearn – and that we be open to wherever the evidence may lead us. Even as adults and professionals, we have been birthed to learn, to change. Sociologist Philip Slater suggests that a reorientation in how we perceive ourselves, others and the world around us is an imperative: Begin by “thinking of yourself as a process. It means thinking of everyone and everything around you as a process. It means becoming a verb.” [20]

In every sense, our most recent experience with economic implosion was the result of an imagined economy – the cumulative effect of ideas, attitudes, beliefs, policies and practices that resulted in a contagion – a systemic illusion. One in which “An illusory prosperity shone over the land, and so dazzled the eyes of a whole nation, that none could see the dark cloud on the horizon announcing the storm that was too rapidly approaching.”[21]  Yet, it is a period that presents us with an opportunity today as; “being spectacularly wrong is often the most powerful stimulus to fresh thinking.”

How did the largest economy in the entire world succumb to such single-mindedness? How did a nation with a reputation for economic rationality and mindfulness succumb to such mindlessness? [22] What if the results of psychological research relative to decision-making indicate; “our comforting conviction that the world makes sense rests on a secure foundation:  our almost unlimited ability to ignore our ignorance?” (emphasis is mine)[23] Perhaps there are other dimensions of the illusion that is upon us. What if the current research regarding how we think reveals: “The core of the illusion is that we believe we understand the past, which implies that the future also should be knowable, but in fact we understand the past less than we believe we do…It is that the language (our assumptions as to our capacity to know) implies that the world is more knowable than it is. It helps perpetuate a pernicious illusion?” [24]

Enter former Princeton research psychologist and Nobel prize winner in economics Daniel Kahneman –  along with his book Thinking, Fast & Slow.

IV. LORA & Intuitive Overconfidence:

As we explore the current research findings on how the human mind actually operates, Dan Kahneman’s book serves as a guide.

Kahneman describes loss aversion as follows: the relative strength of two motives: we are driven more strongly to avoid losses than to achieve gains.[25] It sounds simple enough. Kahneman goes on to say; the idea that people evaluate many outcomes as gains and losses and that losses loom larger than gains, surprises no one.[26] Here’s where it gets a little more complex. This is the juncture where Kahneman’s book begins to illuminate avenues of inquiry for further research, practice and policy considerations.

Lenders/loan originators/evaluators and managers of credit risk/regulators/rating agencies – are intended to be the assessors of risk in our financial system. They are the mediators of the tension between production and protection – evaluating, structuring and managing risk. They serve to provide the essential objectivity and balance essential to the maintenance of risk their respective organizations might embrace. Yet, they’re human – unable to escape the influences that applied psychology and cognitive/behavioral/neuro economics have revealed.

If, as Kahneman states above, we are driven more strongly to avoid losses than to achieve gains, what happened during the run-up to the U.S. financial crisis when we succumbed to reckless endangerment – the result of unfettered risk taking? What happened to LORA? What role does optimism play in all this? Kahneman says: “Then they come together, the emotional, cognitive, and social factors that support exaggerated optimism are a heady brew, which sometimes leads people to take risks that they would avoid if they knew the odds… Optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers…. Acting on pretended knowledge is often the preferred solution.” [27] What? We pretend to have knowledge we don’t possess to justify, rationalize and support human decision making? Unfortunately, we do. Perhaps it’s time to get honest about all this.

Avenue of Inquiry – The Mediation and Measurement of the Tension between Production and Protection – Can the pursuit of profits somehow become the loss we are driven to avoid? If one is domiciled in a publicly traded company who has provided quarterly forecasts to analysts, does the desire to meet or exceed the expectations of the street become the priori loss we are attempting to avoid? When does this occur? How does this occur? Within the decision-making matrices inherent in risk management, when does protection morph into production or vice versa? How might each be measured? How might they be monitored? How are each influenced? What role does optimism play in this interplay with the aforementioned? What if social distance is introduced (from personal accountability, to organizational, to shareholder, to securitization, to bondholder, to systemic)?

As Kahneman says, “The aversion to the failure of not reaching the goal is much stronger than the desire to exceed it.” [28] He shares an example from researchers who have demonstrated that golfers try much harder to avoid a bogey (a loss) vs. missing a birdie putt (a foregone gain). There is ample evidence from the post-mortems that have been authored about The Great Recession to support the need for additional inter-disciplinary social research in this area. What are a few conclusions and policy opportunities that arise? Let’s look inside at a few:

Humans are equipped to assess risk. Yet, as Kahneman’s work makes vividly apparent: “A recurrent theme of this book: many people are overconfident, prone to place too much faith in their intuitions. They apparently find cognitive effort at least mildly unpleasant and avoid it as much as possible.” [29]  Experience is a highly valued commodity in the U.S. financial services industry. We assume that experience translates into more effective decision making. Yet, experience – and the attendant familiarity that accompanies it – leads people to over rely upon their own intuitive capacity – oftentimes leading one (and others) toward overconfident biases and ultimately inaccurate and unhealthy judgments.

Risk is a human perception. It is an observation – an assessment that is cumulatively influenced by ideas, attitudes and values that are both internal and external to the individual, groups of individuals, organizations – and nations. Risk assessment is an outcome – the outcome of decision making mindshare – one that is influenced by the evaluators’ past, present, intuitive predictions about the future, assumptions about reality, how the relative weight of certain factors influence us, interpretive capacity, data, and the influence of others. Risk assessment, as an outcome, is a product of human judgment. Risk assessment is influenced by policy and process – the framework within which we ask individuals to justify and/or legitimize their risk assessment decision making. Risk assessment policy and process are the embodiment of human judgments – whose merit has been formally acknowledged as both healthy and essential as guidance mechanisms within the organizations’ decision making matrices. As Kahneman adroitly points out, the human mind possesses tendencies in terms of processing the inputs it receives. An understanding of these tendencies is an opportunity to better equip those who are involved in the risk assessment process with the edge that this understanding provides. The influencers of this process currently appear to seep into the human, organizational and national bloodstream. [30] Seep is simply insufficient. [31] Kahneman’s book provides the concrete evidence for that.

The entirety of the theoretical framework relating specifically to lenders/evaluators/managers of credit risk (including regulators and those charged with oversight of the people, processes and organizations involved therein) begs to be addressed. More specifically, I suggest the following:

Education & Training – A tremendous opportunity exists to further educate those currently involved in risk assessment/management, based upon a new, targeted approach. This effort must include the most current research results from the fields of psychology, cognition, neuroscience and behavioral economics – an inter-disciplinary approach. Kahneman’s book contains a plethora of concrete content pertinent to this opportunity. One of the primary objectives of this E&T initiative is to equip people with what we do know about the human cognitive processes that influence perception, judgment and the process of assessing risk. If the research results that Kahneman cites is valid, that many people are overconfident, prone to place too much faith in their intuitions, another objective of the E&T initiative is to introduce both the necessity and tools to begin unlearning the tendencies we have acquired that may be both counterproductive and counter-intuitive to what we think we know and how we do what we do. Sociologist Daniel Levinson has described this unlearning as the process of de-illusionment, whereby “a reduction of illusions, a recognition that long held assumptions and beliefs about self and world are not true. This process merits special attention because illusions play so vital a role in our lives throughout the life cycle.[32]

Is unlearning challenging? Of course it is. NYU’s Clay Shirky cogently captures the nature of the challenge in the following: “We humans have never been terribly good at subjecting our own beliefs to the kind of withering scrutiny that might disprove them. We do have a related skill, however; we are quite good at subjecting other people’s beliefs to such scrutiny.”[33] I can hear it now; people’s souls beginning to growl at the thought of another training seminar. Nobody is to come to this training with all the answers; teacher or student. We live in a world overflowing with ideas, perspectives, information that are considered by some (typically the speaker) as right and true. Instead of an “answer delivery session” this E&T is designed counter-intuitively; to equip people to begin to champion the ability to ask different questions. As another author says, “for employees to solve problems or to learn new things, they have to know what questions to ask. The ability to ask the right questions is the single most important skill.”(emphasis is mine) [34] Author Michael Lewis has made the following observation about the most recent real estate bubble in Ireland: “…it was sustainable so long as it went unquestioned and it went unquestioned as long as it appeared sustainable.” [35]

Occupational/Employment Assessment Testing/Professional Education – If the Great Recession has taught us anything, it is that people have variable tendencies and abilities relative to occupations and careers in risk assessment/management. Heretofore, our focus has been on skill assessment – typically related to prior experience, education, conflict resolution skills, communication capacity, financial analysis, industry experience, transaction experience, familiarity with debtor-creditor law, or regulatory frameworks. A review of job descriptions for these types of occupations is a place to begin. Job descriptions contain the outdated assumptions that continue to populate our minds, as we seek either to evaluate the employability of new candidates or the merit of promoting existing employees to positions of increasing risk assessment/risk management responsibilities. The opportunity exists to implement assessment testing specific for these occupations – both as pre-employment and ongoing in-service assessments. Finally, ongoing professional education that incorporates the current findings of social and behavioral research should be a staple for these occupations.

Pre-mortem Assessments – within the political milieu of the evaluation of risk, employees at various levels within the organization, may engage in group discussions of risk. Unfortunately, these discussions are typically populated by what we believe we know or relative certainties. Organizations adore certainty. Kahneman observes: “An unbiased appreciation of uncertainty is a cornerstone of rationality – but it is not what people and organizations want. Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution. [36] How might individuals and organizations overcome the challenge that certainty/uncertainty presents? Neuroscientist Dr. Robert A. Burton reminds us: “Certainty is not biologically possible. We must learn and teach our children) to tolerate the unpleasantness of uncertaintyWe do not need and cannot afford the catastrophes born out of a belief in certainty.[37] Once again, Kahneman suggests: “The premortem has two main advantages: it overcomes the group think that affects many teams once a decision appears to have been made, and it unleashes the imagination of knowledgeable individuals in a much-needed direction…The main virtue of the premortem is that it legitimizes doubts. Furthermore, it encourages even supporters of the decision to search for possible threats that they had not considered earlier.[38] Translation: At the outset, two or more heads may be better than one, as long as the free exchange of doubts and independent, original thinking remain unobstructed and paramount. Leave titles, egos and power in the waste can outside these deliberations.

Licensing and Performance Tracking – For those involved in risk assessment occupations whose organizational operations are supervised by state and federal regulators (FDIC, OCC, FSLIC, OTS, NCUA etc.) – employees must be licensed. By licensure, I mean the attribution of a specific designator associated with an individual engaged in lending. This tracking would include all employees involved in the evaluation of/the origination of consumer and commercial credit extensions by regulated institutions…as well as any subsequent modifications of the same. This code would follow an individual throughout one’s career in lending. Frankly, FDIC insured banks currently associate a lender (employee/officer) specific code to an individual who originates a lending transaction for internal tracking purposes (Typically, for incentive or portfolio management considerations). Furthermore, tracking of this nature should also be applied to employees of non-regulated financial services providers (or the future emergence of shadow financial services companies) such as home mortgage originators/mortgage brokers. I’ll leave it to others to model the framework for this.

I have seen far too many cases of individuals who have gone from one risk assessment/management job to another at a different organization(s) – whose track record should have elicited some type of regulatory recognition for credit quality downgrades and/or losses that resulted from their risk assessment behavior. This approach would address what one author succinctly describes in the following: “One of the biggest problems with risk is that its real level and nature are clear only with hindsight.” [39] Thus, the prudence of tracking the systemic, longitudinal results of individual decision making behavior in these occupations remains an unaddressed necessity. As long as we continue to employ human beings as the primary exercisers of judgment in the risk assessment/management process, those charged with their oversight have the duty to monitor and track the results of those so employed by the organizations under their purview. Clearly, the abject, systemic failure of private sector employers to do the same remains wholly inadequate and must be bolstered by systemic regulatory monitoring and reporting requirements to address this malady. Finally, regulators must be empowered with sanctioning authority – including the ability to revoke the right to work for an individual within the universe of regulated organizations.

Looking for LORA inside the mind of risk management demands a renewed sensitivity for recognizing the ongoing opportunities that arise to facilitate ongoing research, develop and deploy essential education & training, assess the tendencies/propensities of prospective new employees, reform and reinvent current practices, and inform policy development – implementing systemic, longitudinal oversight of the human beings exercising critical judgments, encompassing the employees of those organizations within the regulated financial system.

V.  LORA – Lost In The Crowd:

We are influenced by those around us…in ways that we may not presently imagine. Did you know that research has confirmed that we humans “share mental processes across the invisible space between us – are people able to feel what others experience as if it were happening to them?” [40] Our decision-making tendencies are impacted by the mental and cultural mores of the group. These influences become acute when we become members of an occupational group, career path or profession. It is here where humans are exposed to the necessity to enhance skill sets, presently defined as pertinent to the profession. It is also the arena where we can succumb to the influences of the illusory acquisition of expertise – where we assume our decision-making ability has become more broad, deep and effective than it actually is. Our confidence may increase. We may feel an increase in the validity of our judgments. We may become more certain in the outcome of our judgments. We may come to believe our observations within a risk-assessment financial services milieu possess more validity than they actually do. Kahneman cautions: “the illusions of validity and skill are supported by a powerful professional culture. We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers. Given the professional culture of the financial community, it is not surprising that large numbers of individuals in that world believe themselves to be among the chosen few who can do what they believe others cannot.” [41] The economic catastrophe  produced by employees and organizations in the U.S. financial services industry have aptly demonstrated that they are quite capable of the unimaginable; errors in human judgment whose cumulative impact have earned the employees, organizations and industries they represent as, unfortunately, the chosen few who can do what they believe others cannot. Frankly, whether you buy that characterization or not, (public opinion polling supports it), this negative public perception is one that cannot be dismissed by dialog. The financial services industry is going to have to behave its’ way out of this perception, as demonstrated by the results its’ future behavior produces, as the empowered economic actors whose improved capacity to make judgments of risk produce distinctly more positive, productive and enduring outcomes, for all stakeholders.

The U.S. financial services industry employs some 5.7 million people – making a contribution to 2009 GDP of 6%.[42] The depth, breadth and inertia of mindshare within the industry are daunting. From 1998-2008, the financial services lobby spent in excess of $5 billion attempting to influence legislation in the U.S. (campaign contributions and lobbying expenses – includes securities and insurance industries). [43] Yet, those companies who have the courage to break from the pack and intentionally provide their employees with the opportunities to explore their unrealized potential, as identified in this article, will garner competitive advantages that the inertia of conformance to the status quo prevents.

Running with the pack saddled with the baggage of past experience, routines, attitudes, beliefs, tendencies and behaviors generated by the same cognitive equipment –  just ain’t gonna cut it. As one author says, “rather than try to learn from experience, we might be better to experience learning.” [44] Looking for LORA requires us to be cognizant of the nuances, complexities and impediments that the crowd presents.

Summary & Conclusions:

Imagine life without gravity. Imagine a situation in the U.S. economy where Bear-Stearns was sold for $10 a share to J.P. Morgan Chase, Merrill-Lynch was sold over a weekend to Bank of America, where Washington Mutual Bank failed and was sold to J.P. Morgan/Chase, where Lehman Brothers failed, Indy Mac Bank failed – along with 400 U.S. other banks…where the risk managers within the U.S. financial services industry bought in to the myths that housing prices will continue to appreciate…and virtually everybody can qualify to own a home in America…where the cost to the U.S. economy is estimated at $5.9 trillion dollars…and counting.

Imagine a situation when we lost our risk aversion (LORA). Kahneman says: “Loss aversion is a powerful conservative force that favors minimal changes from the status quo in the lives of both institutions and individuals. This conservatism helps keep us stable in our neighborhood, our marriage, and our job; it is the gravitational force that holds our life together near the reference point.” [45] Well, we did lose LORA…and shall continue to pay the unimaginable price for doing so for many decades to come.

In his book, Thinking, Fast and Slow, Dan Kahneman says: “The emotions that people attach to the state of their mental accounts are not acknowledged in standard economic theory.” Perhaps it’s time to recognize that standard economic theory has failed us…brutally. Maybe it’s time to begin to very seriously explore the inter-disciplinary contributions that other fields might provide to bolster the applied performance of the human beings making risk assessment judgments throughout the U.S. financial services industry. As stated by neuroscientist Dr. Robert. A. Burton: “the feelings of knowing, correctness, conviction, and certainty aren’t deliberate conclusions and conscious choices. They are mental sensations that happen to us.” [46] Perhaps you, your employees, your organization and your industry might derive a competitive advantage by intentionally exploring the implications of the findings from those on the frontiers of social science research. What if we might think more effectively by virtue of a vastly better appreciation of how the human mind works from those who have discovered the same?

I’ll conclude with a pertinent quote from David Brooks: “The human race is not impressive because towering geniuses produce individual masterpieces. The human race is impressive because groups of people create mental scaffolds that guide future thought.” [47]

Having experienced the depth and breadth of the consequences of the loss of risk aversion, perhaps it’s time to direct our attention to the mental scaffolds that we have fallen from, before we begin to erect the same structure all over again…

…it’s just a thought




[1] Kahneman, Daniel  Thinking, Fast and Slow – Farrar, Straus and Giroux New York,NY Copyright (c) 2012 by Daniel Kahneman, p. 331.

[2] Kindleberger, Charles P. & Aliber, Robert Manias, Panics and Crashes – A History of Financial Crises, John Wiley & Sons, Inc. Hoboken, NJ Copyright © 2005 by Charles P. Kindleberger and Robert Z. Aliber; 1978, 1989,1996, 2000 by Manias, Panics and Crashes – A History of Financial Crises Charles P. Kindleberger. Fifth Edition, p.73.

[3] http://online.wsj.com/article/SB122409761899937343.html

[4] http://www.washingtonpost.com/wp-srv/business/post200/2005/CBMD.html

[5] See the report at:


[6]  Curry, Timothy & Shibut, Lynn The Cost of The Savings & Loan Crisis: Truth or Consequences: http://www.pdfdownload.org/pdf2html/pdf2html.php?url=http%3A%2F%2Fwww.fdic.gov%2Fbank%2Fanalytical%2Fbanking%2F2000dec%2Fbrv13n2_2.pdf&images=yes

[7] Ibid.


[9] http://portalseven.com/banks/US_Failed_Banks.jsp?year=2007

[10] Ibid.

[11] Kahneman, Daniel  Thinking, Fast and Slow – Farrar, Straus and Giroux New York,NY Copyright (c) 2012 by Daniel Kahneman, p. 331.

[12] Morgenson, Gretchen and Rosner, Joshua Reckles$ Endangerment – How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, Times Books – Henry Holt & Comapany, LLC New York, NY, Copyright © 2011 by Gretchen Morgenson & Joshua Rosner, p. 12.

[13] Ross-Sorkin, Andrew Too Big To Fail – The Inside Story of How Wall Street and Washington Gought to Save the Financial System – and Themselves, VIKING Penguin – The Penguin Group (USA), Inc. Copyright © 2009 by Andrew Ross Sorkin, p.7. & 539.

[14] Shenk, David The Genius In All of Us – Why Everything You’ve Been Told About Genetics, Talent and IQ is Wrong, DoubleDay – a Division of Random House, Inc. New York, NY Copyright © 2010 by David Shenk. P. 9.

[15] Hedges, Chris Empire of Illusion – The End of Literacy and the Triumph of Spectacle, Nation Books New York, New York Copyright © 2009 by Chris Hedges, p. 20.

[16] Akerlof, George A. and Shiller, Robert J. – Animal Spirits – How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism, Princeton University Press Princeton, NJ USA and Oxford, UK Copyright © 2009 by Princeton University Press, p. 55.

[17] Brooks, David THE SOCIAL ANIMAL – The Hidden Sources of Love, Character, and Achievement, Random House – an imprint of the Random House Publishing Group, a division of Random House, Inc. New York, NY Copyright © 2011 by David Brooks. p. X.

[18] Ibid. p. 245

[19] Csikszentmihalyi, Mihaly Finding Flow – The Psychology of Engagement With Everyday Life, Basic Books –  – A Member of the Perseus Books Group Copyright © 1997 By Mihaly Csikszentmihalyi. P. 3.

[20] Slater, Philip The Chrysalis Effect – The Metamorphosis of Global Culture, SUSSEX Academic Press, Brighton, U.K. and Portland, OR Copyright © 2009 by Philip Slater, p. 83.

[21] MacKay, Charles Extraordinary Popular Delusions and the Madness of Crowds, Wilder Publications Radford, VA Copyright © 2008 Radford Publications, p.19.

[22] SEE Harvards’ Langer, Ellen J. The Power of Mindful Learning, DA CAPO Press – A member of the Perseus Books Group. Cambridge, MA Copyright © 1997 by Ellen Langer, Ph. D. Dr. Langer’s work is a fascinating treatise on the concepts of mindfulness vs. mindlessness. Her body of work provides fertile ground for behavioral economics research endeavors.

[23] Kahneman, Daniel Thinking, Fast and Slow, Farrar, Straus & Giroux New York, NY Copyright © 2011 by DanielKahneman, p.201.

[24] Ibid. Kahneman p. 201.

[25] Ibid. Kahneman p.302.

[26] Ibid. p. 300.

[27] Ibid. p. 262.

[28] Ibid. p. 303

[29] Ibid. p.45

[30] SEE McGee, Suzanne Chasing Goldman Sachs – How The Masters of The Universe Melted Wall Street Down…And Why They’ll Take Us To The Brink Again, CROWN Business – Random House, Inc. New York, NY Copyright 2010 by Suzanne McGee. NOTE: McGee’s treatise is a superb resource for developing a more comprehensive understanding of the concept of ‘LOLA.’ It also contains innumerable insights on both the issues of production (profits) vs. protection (loss avoidance), and the multi-dimensional nature of risk assessment/management/transfer throughout the U.S. economy.

[31] Ibid – The concept of seeping into the bloodstream is McGee’s.

[32] Levinson, Daniel J., The Seasons Of A Man’s Life, New York: Ballantine Books, a division of Simon & Schuster, 1978, p.192

[33] Shirky, Clay Cognitive Surplus – Creativity and Generosity in a Connected Age, The Penguin Press, New York, NY Copyright 2010 by Clay Shirky. p. 136.

[34] Wagner, Tony The Global Achievement Gap – Why Even Our Best Schools Don’t Teach The New Survival Skills Our Children Need – And What We Can Do About It, Basic Books – A Member of The Perseus Books Group, New York, NY Copyright © 2008 by Tony Wagner. P.2.

[35] Lewis, Michael Boomerang – Travels in the New Third World, W.W. Norton & Company, Inc. New York, NY Copyright © 2011 by Michael Lewis p. 91.

[36] Kahneman, Daniel Thinking, Fast and Slow, Farrar, Straus & Giroux New York, NY Copyright © 2011 by Daniel Kahneman, p.263 & 265.

[37] Burton, Robert A. M.D. On Being Certain – Believing You Are Right Even When You’re Not, St. Martins Press, New York, NY Copyright © 2008 by Robert A. Burton, M.D. p.223-224.

[38] Kahneman, Daniel Thinking, Fast and Slow, Farrar, Straus & Giroux New York, NY Copyright © 2011 by Daniel Kahneman, p. 264-265

[39] Ibid. p. 225

[40] See in Brooks, David THE SOCIAL ANIMAL – The Hidden Sources of Love, Character, and Achievement, Random House – an imprint of the Random House Publishing Group, a division of Random House, Inc. New York, NY Copyright © 2011 by David Brooks. p. 39.

[41] Ibid. Kahneman – p. 217.

[42] Securities Industry & Financial Markets Association. U.S. Financial Services Industry – Contributing to a More Competitive U.S. Economy, July 2010, See Report at: http://www.pdfdownload.org/pdf2html/view_online.php?url=http%3A%2F%2Fwww.ita.doc.gov%2Ftd%2Ffinance%2Fpublications%2FU.S.%2520Financial%2520Services%2520Industry.pdf

[43] See Sold Out by Center For Responsible Politics at: http://www.pdfdownload.org/pdf2html/pdf2html.php?url=http%3A%2F%2Fwallstreetwatch.org%2Freports%2Fpart2.pdf&images=yes

[44] Langer, Ellen J. Counter Clockwise – Mindful Health and the Power of Possibility, Ballantine Books – an imprint of Random House Publishing Group, Random House, Inc, New York, NY Copyright © 2009 by Ellen Langer, Ph. D. p. 30.

[45] Ibid. Kahneman p. 305.

[46] Burton, Robert A. M.D. On Being Certain – Believing You Are Right Even When You’re Not, St. Martins Press, New York, NY Copyright © 2008 by Robert A. Burton, M.D. p.218.

[47] Brooks, David THE SOCIAL ANIMAL – The Hidden Sources of Love, Character, and Achievement, Random House – an imprint of the Random House Publishing Group, a division of Random House, Inc. New York, NY Copyright © 2011 by David Brooks. p. 149.

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