Is there a link between the behaviour of “bankers” who have been credited with bringing down the world’s financial system as they pursued ever-greater bonuses, and British parliamentarians who have been credited with ripping off the taxpayer in an orgy of greed and dishonest expense claims?

Clearly, in the minds of much of the press and perhaps most of the public, there IS a link in that both groups have been driven by greed and avarice … or so it is assumed. But is this actually true?

The neoclassical economic approach (and the one that underpins the position of much of the press on this matter) is that both groups have been exercising rational and fully informed decision-making and have concluded that the long-term financial benefits accruing from their decisions are of far greater economic value than the costs incurred. But this is to fully misunderstand that neoclassical economic theory simply does not apply in cases where a behavioural approach makes more sense – in fact, economists, in their attempt to be regarded as the umbrella science for understanding everything that happens in the world, have even invented a new branch of their ‘dark art’ and called it behavioural economics. In this version of economics, the practitioners say that neoclassical economic theory is always correct except when it is wrong!

The reality of what has happened with both the bankers and the British parliamentarians is that they have not been behaving in an economically rational and fully informed manner but, rather, have been subjected to a version of what behavioural psychologists call ‘group think’. Behaviourists recognise that when someone sees others in a group behaving in a certain way without suffering any ‘cost’ to themselves, then they assume that the behaviour exhibited by the group members is both acceptable and approved. Once the observed behaviour is seen to be ‘normal’ for the group, the observer adopts it when they join the group. This not only removes any guilt from the new participant but also ensures acceptance by other group members. The whole cycle then becomes a self-perpetuating norm. The bankers took ever-bigger risks because such behaviour was a ‘norm’ within their group environment, and the acceptability of their behaviour was reinforced by the payment of large rewards. The British parliamentarians utilised the flexibility of the expense claim system in a way that ALL parliamentarians have done (the PM, Gordon Brown must be dreading the moment that his expenses are exposed!) and, since everyone does it, they have assumed it is acceptable and since all the other MPs do it as well, then group membership is reinforced. Approval of the behaviour is then delivered by the expenses being paid.

The world’s bankers and British MPs are neither dishonest nor greedy – any more than anyone else is – but they are guilty of suspending their ethical decision-making in favour of group norms. As such, they’ve done nothing wrong and should not be punished. Punishment is for those who have transgressed the rules and regulations – and for those that have exposed the lack of judgement of their peers (look what happens to whistleblowers and others that break with the norms of the group). We shouldn’t be attempting to penalise bankers and MPs, we should be looking for ways to ensure that the system is changed and regulated in a way that ensures that this form of behaviour is not allowed to get out of hand again.

On the other hand, we can expect that those responsible for ensuring that the banks and the MPs behave in a manner that is acceptable to their stakeholders (including the taxpayers and society in general) do their job properly – and if we’re looking for scapegoats, then we should look at the CEOs and other senior managers of the banks along with the party leaders in the British Parliament (including the PM) and if they did nothing to avert the abuses, then they should be called to account and fired! Penalising junior bankers by eliminating the bonus system is simply wrong – a subject I’ll come back to in a post in the near future. And penalising ministers and other MPs is also wrong. It is the leaders of these institutions, those that permitted and perpetuated this systemic abuse, that should be removed – and the sooner the better.

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