From SVB to the BBC: why did no one see the crisis coming?

Michael Skapinker in The FT  

Silicon Valley Bank collapses after its investments in long-dated bonds made it vulnerable to interest rate rises. The BBC is thrown into chaos after suspending its top football pundit and colleagues abandon their posts in solidarity. JPMorgan Chase suffers reputational damage and lawsuits after keeping sex offender Jeffrey Epstein on as a client for five years after he pleaded guilty to soliciting prostitution, including from a minor. 

In all these cases, we can ask, as Queen Elizabeth II did on a visit to the London School of Economics during the global financial crisis in 2008: “Why did no one see it coming?” 

Did anyone in the BBC’s leadership ask whether, if they suspended Gary Lineker from presenting its top Saturday night football programme Match of the Day, other pundits might walk out too? Did SVB run through the risks attached to its investment policies if interest rates rose faster than expected? And why did JPMorgan accede to senior banker Jes Staley’s desire to keep Epstein on? These are dramatic examples of what can go wrong, but any organisation that fails to keep its possible risks under regular review could go the same way. 

All too often senior managers fail to consider the worst-case scenario. Why don’t they listen to doubters? 

Amy Edmondson, a professor at Harvard Business School, says sometimes it is because there are no doubters. Leadership groups become so locked into a “shared myth” that they ignore any suggestions they might be wrong. “We’ve got the well-known confirmation bias where we are predisposed to pick up signals, data, evidence that reinforce our current belief. And we will be filtering out disconfirming evidence,” she says. 

It is like taking the wrong route in a car. “You’re on the highway driving somewhere and you’re heading in the wrong direction, but you don’t know it until you’re just hit over the head by disconfirming data that you can’t miss: you suddenly cross a state line that you didn’t expect to cross.” 

This groupthink and confirmation bias is prevalent in the wider society, where people leap on any evidence to support their view on, for example, climate change, Edmonson says. “Oh my gosh, this is the coldest winter ever. What do you mean global warming?” 

In many cases, there are doubters, but they are either reluctant to raise their voices or, when they do, colleagues hesitate to join them. At JPMorgan, there were questions about Epstein. An internal email in 2010 asked: “Are you still comfortable with this client who is now a registered sex offender?” 

James Detert, a professor at the University of Virginia’s Darden School of Business, says evolution has hard-wired us not to deviate from our group. “If you think about our time on earth as a species, for most of it we lived in very small clans, bands, tribes, and our daily struggle was for survival, both around food security and physical safety. In that environment, if you were ostracised, you were going to die. There was no solo living in those days.” 

We carry this fear of being cast out into our workplaces, compounded by the experience of whistleblowers, who sometimes suffer retribution from their employers and are shunned by colleagues. Dissenters present their colleagues with an uncomfortable choice: either to view themselves as cowards for not speaking up too, or to regard the rebel as “some kind of crackpot”. The second is often easier. 

Isn’t the Lineker saga a counter-example? His colleagues supported him, forcing the BBC to quickly see how badly it had miscalculated. Detert says this was an unusual case. Celebrated footballers-turned-commentators are brands themselves, Lineker in particular. The BBC realised how much it needed him, and how easily he could have secured a contract with a rival. Usually, he says, rebels find themselves isolated. 

So what can leaders do to encourage doubters to speak up, to ensure they consider all the possible downsides of their strategies, and escape eventual humiliation or disaster? Detert is not a fan of appointing a “devil’s advocate” who is tasked with giving a contrary view. It is often clear that they are simply going through the motions. He prefers what he calls “joint evaluation”. As well as the preferred policy — investing in long-dated bonds, for example — senior managers should draw up a distinctively different policy and compare the two. This is more likely to show up the flaws in the preferred strategy. 

Simon Walker, whose roles have included head of communications at British Airways and spokesman for Queen Elizabeth, and Sue Williams, Scotland Yard’s former chief kidnap and hostage negotiator, told me at an event organised by the Financial Times’ business networking organisation, that leaders should involve every function from communications to legal to HR when examining possible future crises. Detert agrees this can be valuable, provided the presence of often under-regarded departments such as HR is taken seriously. 

Leaders’ behaviour is a signal of whether they want staff to speak up. Edmondson says: “Leaders of organisations have to go out of their way to invite the dissenting view, the missed risk. Before we close down any conversation where there’s a decision, we need to say, without fail: ‘What are we missing?’ We say: ‘OK, let’s just say we’re wrong about this and it goes badly awry, what would have explained it?’” She recommends calling on people by name, asking what their thoughts are. 

Detert adds that office design can signal to staff that their thoughts are welcome: the leader sitting in open plan, or having bright stripes on the floor indicating the way to their office, or sitting at square tables without place names rather than at rectangular ones where their seat position makes it obvious they are in charge. 

How relevant are these workplace layouts when, post-lockdown, employees no longer come into the office every day? “That’s the $10mn question,” Detert says. On the one hand, remote working might be making it harder for leaders to read the signs that people are uneasy with a strategy. On the other, it could be that people find it easier to speak out from their own homes. They may also feel that other aspects of their lives, such as family, are now more important than work, which could encourage them to talk. 

Others think SVB’s relaxed remote-working culture, which meant senior executives were scattered across the US, contributed to its failure. Nicholas Bloom, a Stanford professor who has studied remote working, told the Financial Times: “It’s hard to have a challenging call over Zoom.” Hedging interest rate risk was more likely to come up over lunch or in small meetings. 

Leaders also need to persistently praise people who speak up. The penalties for doing so are often more obvious than the rewards. Those who keep their heads down are seldom blamed. As Warren Buffett said: “As a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.”

This pandemic has exposed the uselessness of orthodox economics

Post Covid-19, our priority should be to build resilient systems explicitly designed to withstand worst-case scenarios opines Jonathan Aldred in The Guardian 

 

‘Framing the future in terms of probabilities gives us the illusion of knowledge and control, which is extraordinarily tempting, but it’s all hubris.’ Photograph: Daniel Sorabji/AFP via Getty Images


Even before the pandemic came along, the world economy faced a set of deepening crises: a climate emergency, extreme inequality and huge disruption to the world of work, with robots and AI systems replacing humans.

Conventional economic theories have had little to offer. On the contrary, they have acted like a cage around our thinking, vetoing a range of progressive policy ideas as unaffordable, counter-productive, incompatible with free markets, and so on. Worse than that, economics has led us, in a subtle, insidious way, to internalise a set of values and ways of seeing the world that prevents us even imagining various forms of radical change.

Since economic orthodoxy is so completely embedded in our thinking, escape from it demands more than a short-term spending splurge to prevent immediate economic collapse, vital though that is. We must dig deeper to uncover the economic roots of the mess we’re in. Putting it more positively, what do we want from post-coronavirus economics?

Mainstream economics has taught us that the only rational way to deal with an uncertain future is to quantify it, by assigning a probability to every possibility. But even with the best expertise in the world, our knowledge often falls far short. Frequently we struggle to predict which outcomes are more likely. Worse still, there may be outcomes we haven’t even considered, futures that no one had imagined, as the pandemic has so vividly shown.

Framing the future in terms of probabilities gives us the illusion of knowledge and control, which is extraordinarily tempting, but it’s all hubris. In the run-up to the 2007 financial crisis, bankers were proud of their models. Then that August, the Goldman Sachs chief financial officer admitted the bank had spotted huge price moves in some financial markets, several times in one week. Yet according to its models, each of these moves was supposed to be less likely than winning the UK national lottery jackpot 21 times in a row. World events sometimes demand humility.

There are clear lessons here for how to address the climate emergency: rather than focusing on the average climate impacts predicted by mathematical models that depend on probabilistic knowledge that is highly unreliable, we must think seriously about worst-case scenarios, and take steps to avoid them. Yet economic orthodoxy pushes us away from precautionary action. If mainstream economics has a single overarching objective or principle, it is efficiency.

Efficiency means getting the most “bang for your buck”, the most benefit for every pound spent. Any other course of action is wasteful, surely? But eliminating waste implies eliminating excess capacity, and we now see the consequences of that in health systems worldwide. Our obsession with efficiency, if it means failing to plan for a pandemic or a climate emergency, will cost lives.

Our priority should be resilience, not efficiency. We need to build resilient systems and economies that are explicitly designed to withstand worst-case scenarios – and have a fighting chance of coping with unforeseen disasters too.

Ultimately the problem with economic orthodoxy lies in how it frames our values and priorities. Decisions must always be about trade-offs – the weighing up of costs against benefits, ideally measured through prices in markets. If we take our ignorance about the future seriously, this cost-benefit calculus should not even get started. Because costs outweighing benefits is the oldest excuse for not taking precautions – and is a recipe for disaster when the benefits, or the costs of inaction, are vastly undervalued.

Cost-benefit thinking also leads us to assume that all values can be expressed in monetary terms. Many politicians and business leaders fixate on statements such as “a 2°C rise in average global temperature will reduce GDP by up to 2%”, as though a fall in GDP measures the true costs of the climate emergency.

In practice, this thinking means that the value of everything is measured by how much people offer to pay for it. Since the rich can always pay more than the poor, priorities get skewed towards the desires of the rich, away from the needs of the poor. So more money is spent on R&D for anti-wrinkle creams than for malaria treatments. Big Pharma has been relatively uninterested in developing vaccines, because a vaccination programme only works if the poor get vaccinated too, which limits the price manufacturers can charge.

We might seem to be beyond that now: the world has woken up, and rich countries will spend “whatever it takes” to tackle the pandemic. But Covid 19 vaccine research – and countless other fields of medical research with the potential to save as many lives in the long-term – needs continuous, reliable funding over many years. Once the market sees better profit elsewhere, funding will be cut, and the researchers will retire or move on, their experience lost.

Economic orthodoxy supports the narrative that this pandemic is a unique disaster no one could have prepared for, and with no wider lessons for economics and politics. This story suits some of the world’s billionaires, but it’s not true. There is an alternative: the pandemic provides further evidence that to tackle the climate emergency, inequality and any emerging crises, we must re-think our economics from the bottom up.

Interview with Ajit Doval

Students name best (and worst) universities

By Richard Garner, Education Editor and Laurie Martin
Wednesday, 17 August 2011

 

A year is a long time in the world of higher education. A university that has been the most expensive in the country will become one of the best in terms of value for money next year.

The University of Buckingham is ranked third in a table of student satisfaction published today – but those above it will be charging the maximum £9,000 a year for a three-year course.

Professor Terence Keeley, the vice-chancellor, said "We're going from the most expensive university in the UK to the cheapest," he said yesterday, "and we still don't know how to handle that psychologically."
Buckingham, the UK's only private university, scores 93 per cent in a table showing the percentage of students sat each university satisfied with their courses – putting it in third place.

Top of the league table is the higher charging Brighton and Sussex Medical School followed by Cambridge University.

The table, however, would appear to show that if students are looking for value for money next year, they need to look outside of the traditional state-funded university you can go away to and study at for three years.
All those in the top ten that can charge £9,000 a year for their courses and those in England are doing so.
Buckingham University, who will be charging £7,500 a year for a three-year course, and the Open University, which is charging £5,000 a year, are the exceptions.

In Buckingham's case, courses are spread over a two-year period – so the actual cost is £11,250. However, that is still significantly less than the £27,000 for a three-year course at a university charging the maximum.
Professor Keeley is clear as to why students rate the university.

"That's straightforward," he said. "In every other university in Britain, the client is the Government – so they have to work to government targets. Here the client is the student."

Christina Lloyd, director of teaching and learning at the Open University – which has been in the top three for the past seven years, added: "As students become more focused on their finances, quality, value for money and the student experience are more important than ever."

Overall, 83 per cent of students who responded to this year's national student survey said they were satisfied with their courses, nine per cent were dissatisfied and eight per cent said they did not know.

Individual figures ranged from 95 per cent for Brighton and Sussex Medical school to just 67 per cent for Ravensbourne College, a university sector college specialising in digital media and design.

In the further education sector, the figures were more varied with 100 per cent satisfaction registered at Trafford College in Greater Manchester but only 39 per cent in Barnfield College.in Luton and Bedford.
Whilst universities were pleased that the overall satisfaction figures were a slight increase on last year, there was a warning of the impact cuts and rises in fees could have.