All entries for Sunday 01 May 2011

May 01, 2011

Rewarding Bad Decisions?

I came across some literature earlier, where the author argued that there should be separation between the decision-making process, and the outcome of the decision, when it comes to rewarding decision makers for their work. I think that this makes sense in principle, as his argument for this was that there are many other factors that can affect an outcome, which are far beyond the decision maker's control.

This got me thinking about investment banking, and the high-profile that bankers' bonuses have received in the last few years especially. Bankers seem to receive a bonus regardless of how their decisions have played out. But is this because their decision processes are being measured and rewarded, and these are generally robust and deserving, or is it only due to the culture of greed and not linked to them having a good process? I don't know much about the activities of investment bankers to be honest.

Perhaps there is a case that there should be a transition to this system, if it is not being practiced. I think the public who have been forced to bail-out banks around the world would appreciate this, knowing that at least the practices of the bankers were worth rewarding. I appreciate that investment banking is fast-moving, and the methods we have learnt about might not always be appropriate for that, but it might be a good step to restoring public confidence in them.


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