The Big Short Analysis
“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.”- Michael Lewis
Michael Lewis, The Big Short, describes the story of the collapse of Wall Street through the perspective of the people who knew a financial disaster was unavoidable and in turn made a fortune from it. On the surface the story of the Wall Street collapse can be simplified as greedy investors and powerful bankers creating a catastrophe because they are money hungry. However, delving deeper shows the story is much more complex.
Several organizational behavior concepts are apparent in the The Big Short. The following paper analyzes the market crash by 1) examining reward/incentive systems of major firms, 2) exploring who holds power in the market, and 3) using the risky shift and moral hazard phenomenons to understand group motives.
Reward/Incentive Systems
“What are the odds that people will make smart decisions about money if they dont need to make smart decisions–if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; theyre still all wrong.” – Michael Lewis
The purpose of an incentive/reward system is to communicate strategy, motivate employees, and reinforce achievement of organizational goals. Good reward systems involve the following: rewards are contingent on performance, performance required is challenging but possible, rewards are meaningful and valued by members, rewards are timely, the system is clearly communicated, the system differentiates between good and poor performers but does not make poor performers feel helpless and/or unable to improve, and the system is perceived as fair and equitable.
Major firms on Wall Street do not have well-intentioned reward systems as employees are frequently rewarded for no reason at all and have very little to lose. For example, the bankers at JP Morgan who sold Collateralized Debt Obligations were compensated no matter how well or not they (CDOs) performed. This meant that the incentive for each banker was solely to sell as many Collateralized Debt Obligations as conceivable. It didnt matter if they knew they were going to completely blow up in a few months because it wasnt their issue since it wasnt their money.
Lewis says, “The money and bonuses given out by major firms are out of control. Theres no sense of proportion at all in any of it. Employees are paid if they succeed, paid if they fail, paid if they make a stupid bet, and paid if they make a smart bet.” For instance, theres a story of a man named Howie Hubler. Hubler worked for Morgan Stanley and came away with millions