Governance and Ethics – Academic – Financial Crisis Revisited

A Behavioral Approach To The Global Financial Crisis, June 2012

Back on May 6, 2010 the US stock market experienced a crash that has rarely been seen, with the DJIA posting a 1010.14 point swing and also posting the largest one day decline (Vasile, 2012).  This is what the world would lead you to believe, if we were not astute members of society!  The financial gurus, pundits, “experts” call these rare events Black Swan Events also known as “Six Sigma Events.”  Essentially they are saying that these are once in a life time events or events so rare they happen every blue moon.  Personally, I feel these events will happen more often given the readily available information and ease of trading since the advent of the internet.  This particular article sheds some light on the fact that these events are not so rate (somewhat subjective depending on your definition of rare)  in fact they highlight 17 different major events of equal magnitude that have happened since the mid 1600’s stating that these were just a few of the major financial crisis around the world.  The article identifies that throughout time the one constant factor linking all the past and more importantly the present “crisis,” is the human factor. The article goes on to build a model of identifying the human psychology or “animal Spirits” that motivate our financial decisions.

Other than the main topic of the paper it needs to be addressed that there were other reasons for the most current financial crisis while still holding true to the human factor being a major player if not the major player in the most recent financial downturn.  Contributing factors such as monetary policy, government regulation, complex financial markets, etc… were all contributors.  One quote from the Ayn Rand institutes web site sums up my sentiments nicely, “Today’s problems are the result of a government-controlled financial and housing system that rewarded irrational behavior and punished responsible behavior.”  Back to the topic at hand there are various contributing behavioral factors, some unintentional and others that lead us to a more ethically compromising position.  Being human we are all susceptible to mistakes and the majority of us conform to the social norms which is not always the right path as we have seen in the most recent financial crisis where the “go” with the crowd thinking was clearly visible after the fact.  On the other hand there are more sinister effects of human behavior in which the paper clearly states that these ethical collapses “were probably the most important factors that endangered the viability of the financial system.”  Situations where financial and mortgage lenders would forge papers to get loans processed in order to meet quotas while knowing the loans/mortgages would be sold to clear the company balance sheets, are clear examples of ethical lapses.

These oversights and lapses of ethical and moral behavior have serious implications which are affecting each and every one of us today.  Because of the recent financial debacle the government has intruded into or lives even further by enacting such legislation as the Dodd Frank act, we are now in the business as tax payers of bailing our corporation, and let’s not forget the fed of course feels the need continuously print money (lets all pray we don’t turn into the next Weimar republic.)

Vasile, Dedu, Turcan Ciprian Sebastian, and Turcan Radu. "A Behavioral Approach To The Global Financial Crisis." Annals Of The University Of Oradea, Economic Science Series 20.2 (2011): 340-346. Business Source Complete. Web. 25 June 2012.