Goals Gone Wild, Ponzis and the Banks

There is an interesting new paper out looking at the role of goals in causing misbehavior in markets and elsewhere. The applicability to the current downturn seems obvious, from Countrywide’s obsession with loan production to Madoff’s factory approach to ponzi.

The gist:

In this article, we argue that the beneficial effects of goal setting have been overstated and that systematic harm caused by goal setting has been largely ignored. We identify specific side effects associated with goal setting, including a narrow focus that neglects non-goal areas, a rise in unethical behavior, distorted risk preferences, corrosion of organizational culture, and reduced intrinsic motivation. Rather than dispensing goal setting as a benign, over-the-counter treatment for motivation, managers and scholars need to conceptualize goal setting as a prescription-strength medication that requires careful dosing, consideration of harmful side effects, and close supervision. We offer a warning label to accompany the practice of setting goals.

Here is a banking example from the paper:

An excessive focus on goals may have prompted the risk-taking behavior that lies at the root of many real-world disasters. The collapse of Continental Illinois Bank provides an example with striking parallels to the collapse of Enron and the financial crisis of 2008. In 1976, Continental’s chairman announced that within five years, the magnitude of the bank’s lending would match that of any other bank. To reach this stretch goal, the bank shifted its strategy from conservative corporate financing toward aggressive pursuit of borrowers. Continental allowed officers to buy loans made by smaller banks that had invested heavily in very risky loans. Continental would have become the seventh-largest U.S. bank if its borrowers had been able to repay their loans; instead, following massive loan defaults, the government had to bail out the bank.

More:

Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal-Setting
Lisa D. Ordóñez et al.

‘Goals Gone Wild’: How Goal Setting Can Lead to Disaster
Knowledge@Wharton

Ready, aim … fail: Why setting goals can backfire
By Drake Bennett
Boston Globe

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  4. Bear’s Beatdown: A Run on the Non-Banks?
  5. Chanos: Banks vs. Banks