Connecting the classroom to the "real world"
Wall Street: Inside the Collapse – 60 Minutes
60 Minutes ran an interesting piece last night featuring Michael Lewis, the author of a book called The Big Short set to be released this week. One of his contentions touches on something we discuss to varying degrees throughout the course: the behavioral aspects of business and incentives. His feeling (which seems to be strongly supported) is that Wall Street companies and individuals within those companies are given such incentive to produce short-term results (which result in big bonuses to the employees) that they do not consider the long-term implications of their actions. And the fact that the government bails out people that make poor decisions increases the moral hazard that this behavior will continue.
Asked what happened, Lewis said, “The incentives for people on Wall Street got so screwed up, that the people who worked there became blinded to their own long term interests. And because the short term interests were so overpowering. And so they behaved in ways that were antithetical to their own long term interests.”
“Wall Street is able to delude itself because it’s paid to delude itself. I mean one of the lessons of this story is that people see what they’re incentivized to see. If you pay someone not to see the truth, they will not see the truth. And, Wall Street organized itself so people were paid to see something other than the truth. And that’s one of the central messages of this story. You have to be very careful how you incentivize people, ’cause they will respond to the incentives,” Lewis explained.
You can read more at CBS News: http://www.cbsnews.com/stories/2010/03/12/60minutes/main6292458.shtml
Or watch the two-part video I’ve embedded below.
