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Bankers and the anthropic principle

5 April 2013

As the Banking Standards Commission pours scorn on three more bankers, a note of caution is perhaps in order (however unfashionable this may be). In cosmology the “anthropic principle” is often invoked to explain phenomena that would otherwise seem highly improbable – for example the narrow set of conditions which are required for human life to exist. The principle simply turns upside down the fact that if they didn’t, we wouldn’t be talking about cosmology at all.

Much the same observation seems relevant today in banking, but seems never to be understood by the politicians and journalists who comment on the mess we are in. If you allow free market principles to operate over a sufficient number of cycles (remember, a generation in human evolution equates to many more in the hotbed of corporate M&A), you will end up with organisations optimised for shareholder value. That means ones which are leveraged as high as possible, with a gargantuan appetite for risk. And it also means they will be led by people who can only say yes. Quite simply a bank that takes bigger risks will (in the short term) outperform the others, and rapidly will gobble them up, so that the only survivors look just like they do.

So there’s little point in criticising the team at HBOS: if they hadn’t behaved the way they did, they wouldn’t be there in the report. And if you think that punishing them will prevent others doing the same, you’ve completely missed the point I’m making: they will always be replaced by people who are oblivious to that risk. Alignment of bonuses to shift the focus away from the short term will also fail, for exactly the same reason.

The only useful response is to beef up the regulatory framework, reducing leverage greatly. And breaking up the banks into far smaller pieces would act as a “reset” so that the next evolutionary cycle of natural selection will at least be in its infancy rather than the full maturity we have witnessed since 2008. The seeds of the destruction of the new system in turn will no doubt be there, but only as seeds. For a while.

One Comment
  1. The bonus alignment idea looked nice and might work to a slight extent, but it was always a red herring if you were looking at sonething to actually solve the problem.
    As regards the break-up/embryo mammoths analysis, hopefully this gives regulators time to come up with something a little more permanent.

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