Inviting both Amos Tversky and Solomon Asch: It's not all Casino Capitalism

Donald C. Langevoort, Chasing the Greased Pig Down Wall Street: A Gatekeeper's Guide to the Psychology, Culture and Ethics of Financial Risk-taking, Cornell L. Rev. (forthcoming), available at SSRN. Robert Rosen Donald Langevoort demonstrates, again, his ability not only to do behavioral economics but also to reframe it by placing actors in organizational contexts and relations. Behavioral economics, sharing economics' methodological individualism, analyzes biases and cognitive heuristics in regards to individual risk taking. More broadly, social psychology investigates decision effects that result from affects, visceral and cultural factors, as well as pressures toward or against groups and authority. For example, Solomon Asch emphasized that people make decisions in public differently than they would in private, based on their impressions of others, and seeking legitimacy.1 Langevoort presents research that builds on Asch, for example the finding that in the presence of an audience, facing rivals, with time pressure to make a mark, individual motivation may shift from goal attainment to an obsession with winning at all costs.2 Such work not only uncovers other sources of bias, but also it reframes the subject as decision-making rather than only risk-taking. In "the 'competitive arousal' model of decision making,"3 the actor doesn't engage in risk analysis, rather other motivations and models engage the actor. For some it is Tversky or Asch. Langevoort learns and masters work in both traditions, and more. Langevoort's subjects are the decisions that led to the Global Financial Crisis (GFC) and what gatekeepers need to learn from it. A principal-agent approach to the GFC demands explaining excessive risk-taking by theoretically risk-averse employees (invested in and frightened of losing their jobs). Although he has proffered other explanations, in this article, Langevoort focuses on the firm's shaping of actor's understandings and motivations. A principal-agent approach normally addresses the design of appropriate contracts, incentives, compensation and monitoring systems. In this article, Langevoort focuses on understanding the firm's organizational culture. Continue reading "Inviting both Amos Tversky and Solomon Asch: It's not all Casino Capitalism"

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