Why do companies like SAC get themselves into such (alleged) trouble? It’s an important question for anyone who wants to make sure their own organization isn’t crippled by bad behavior. Just think how many incidents of foolish behavior we’ve seen in recent years, from LIBOR manipulation to Madoff’s theft and the exploitation of clients at some investment banks. HSBC narrowly avoided criminal indictment for money laundering, but got hit by a $2 billion fine.
It’s not just finance, either, despite finger-pointing by activists. The biggest-selling British newspaper was vaporized by phone-hacking journalists. Detroit has just gone bankrupt in large part because of a generation-long looting of the city by corrupt “progressive” politicians. And let’s not mention the church.
Sometimes there is clearly pure venality, and every barrel has a few rotten apples.
Just as often, I think, people just can’t see the serious risks they are running. Or, because certain kinds of behavior seem normal because “everyone is doing it”, it is convenient not to ask questions. Groupthink takes over. People lose perspective. They see the immediate gain and deny the existence of longer-term costs. They focus on one goal to the exclusion of all others, and common sense as well. Indictments and billion-dollar fines follow.
As Dan Ariely says in his book Predictably Irrational: The Hidden Forces That Shape Our Decisions:
We can hope to surround ourselves with good, moral people, but we have to be realistic. Even good people are not immune to being partially blinded by their own minds. This blindness allows them to take actions that bypass their own moral standards on the road to financial rewards. In essence, motivation can play tricks on us whether or not we are good, moral people. As the author and journalist Upton Sinclair once noted, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
People find it convenient to be in denial right up to the point everything collapses. Decision-makers often have an astonishing capacity not to see things right in front of them. Blind spots destroy organizations.