Tuesday, 21 April 2009

The higher your position, the more you can gamble

“The bankers’ bonus system has given a huge upside to people who gamble, with no downside for them if their gambles fail.” Edited from remarks made by the Bank of England boss Mervyn King on BBC radio Feb 2009.

As you move up the management hierarchy, the laws of chance play a bigger part. On each promotion you must make bigger decisions, but collecting all the relevant information grows harder and/or you get less inclined to do it.

Perhaps the data you need is uncollectable, perhaps it is unknowable. Perhaps your information systems are inadequate. Perhaps you are a gambler by nature, you have no inclination to collect data or analyse the data you are given.

The higher the manager, the harder it is to challenge their decision, and (in the private sector) the less likely people will question it. The more senior you are, the more money you earn, the more people assume you know what you are doing.

Also, the closer you get to board level, the more you will be surrounded by other gamblers sympathetic to an informal management style. They will give you licence to take bigger gambles, to take bigger decisions with less evidence.

For all these reasons, promotion tends to require and reinforce a willingness to take bigger risks, make bigger gambles. This self-reinforcing spiral reaches its peak at the point where top level managers (like James Crosby) make near random decisions.

The inevitable result is that a large organisation tends to gather a pool of directors who are paid a lot for making under-researched decisions.

“There’s no science behind it. It is simply my judgement that I thought the figure was an appropriate one.” The Chancellor of the Exchequer Alistair Darling explaining how he decided to impose a new 50% tax rate on those who earn over £150,000. April 29th 2009

Admitting the 50% tax rate was a gamble, not backed by analysis of its effect on tax revenue is remarkable. Alistair Darling deserves credit for his honesty.

Note however that decisions that are random in their capacity to deliver return on investment are far from random in other ways – since directors are intelligent people who have their own goals and are skilful at achieving those. Alistair Darling surely had in mind grabbing a headline that would boost his party’s appeal to low-paid voters.

No comments:

Post a Comment