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.


- 5 comments by 1 or more people Not publicly viewable

  1. Good insight Yanik.
    I had been thinking lately about stock brockers and advisors too. Stock markets as is commonly perceived by a common man is majorly luck. In that case, probably what differentiates a common man and a wise professional would be effectiveness in decision-making. Though, it is more of a game of probabilites but a good process of decision making with critical thinking of the outcome and thus deciding upon the investments would probably make it a more robust decision.
    The whole idea is, that decision making is dependent to a great extent on probability, of which human has no control. But the understanding of probability in decision-making is what makes a more effective decisioning process.

    01 May 2011, 15:58

  2. This financial people are amazing they take two year data and they make trend. . . . If the last year’s number is higher you have to get a bonus. . . . . . !!!!!!!!! They also say that we see the last five year financial summary briefly. . . .Hahahahahah. .. . .

    They should have some lessons in variation because they seem that they do not understand it at all. . .. . . So provided that variation is part of our life a special cause may bring an outcome of disaster even if the decision process was good. . . . However i do not know if you take a good decision with really bad results, that you will have money to give bonus after that. . . . HEheheeheheh

    01 May 2011, 18:13

  3. No, perhaps there wouldn’t be enough money for their bonuses! But if that system were in place, hopefully the number of really bad results would go down, as people wouldn’t take the kind of gambles that ruined the financial system this time around. I agree though, they certainly need some lessons in variation. Maybe bonuses should be linked to the previous 5 years’ performance! Maybe they should just get rid of the bonus system anyway…

    01 May 2011, 18:22

  4. I go with get rid of the bonus system aways and abolish the targets. . . . . . . . Targets are not always feasible and it is not always in the decision makers hand. . . .Look in our case: We want to take the master. . . However the bad tutors do not let us. .. . . . ahhahahahahahahah.

    Mater is entirely our own responsibility, the system in Warwick is almost excellent and especially in MBE. I say almost because they have this Varsity in the coner and the dirty duck which delude us. . . .

    01 May 2011, 18:26

  5. I go with get rid of the bonus system aways and abolish the targets. . . . . . . . Targets are not always feasible and it is not always in the decision makers hand. . . .Look in our case: We want to take the master. . . However the bad tutors do not let us. .. . . . ahhahahahahahahah.

    Mater is entirely our own responsibility, the system in Warwick is almost excellent and especially in MBE. I say almost because they have this Varsity in the coner and the dirty duck which delude us. . . .

    01 May 2011, 18:26


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