With the Hayne Royal Commission having issued its final report, executives across the Australian financial sector are asking how to correct circumstances that led to past misconduct. Budgets for governance, risk and compliance measures will swell, but those added resources are not likely to produce the desired result without a reappraisal of what drives human behavior within firms.
Management theory, as it is applied among firms worldwide, persistently elevates the importance of incentives in driving employee behavior. These incentives are seen as primarily financial. Moreover, they also presume the well-known “rational actor” model of human behavior. This results in the belief that, if incentives are properly “aligned,” all will be well and that the optimal way to motivate behavior is oneemployee-at-a-time.
But people are not just motivated by money, nor are they always rational, nor do they act in isolation, and nor do they necessarily realize the factors that shape their own behaviors.
As social critic Eric Hoffer once opined, “When people are free to do as they please, they usually imitate each other.” The social circumstances in which people find themselves, their social networks, and the norms within those networks, are extremely powerful forces motivating behavior, often much more powerful than monetary incentives or individual desires.
Peer pressure is powerful in all domains of human behavior — from eating to smoking to voting to violence. In the past few years, my lab has done many experiments in online and offline settings exploring diverse interventions to change collective behavior and documenting the impact of social contagion. We have shown that public health interventions ranging from vaccination to vitamin supplementation can spread between people; that we can strategically seed rural villages with information about well-baby care and create artificial tipping points in cultural norms for such care; and that we can foster the ability of online groups to cooperate and coordinate on shared goals.
We have also shown that the behaviors of professionals within their own networks can also be linked, as in the case of the diffusion of innovations among networks of doctors. And in large-scale studies involving millions of people, we have documented the spread of emotional states, spreading from person to person to person. Behavior, in short, is contagious.
These findings hold lessons for the financial industry.
Researchers have demonstrated, using inventive experiments1, that people who work in banks, when primed to think of themselves in the context of their workplace, are more likely to behave dishonestly. This was not the case for subjects in such experiments who worked in other industry sectors. These results suggest that the prevailing business culture in the banking industry may undermine a commitment to honesty. “What is common is moral.”2
Dishonesty, proscribed behaviors, and fraud likely spread via processes of social contagion like all other observed human behaviors. It is not about bad apples; it is about bad barrels. People will behave in a risky manner when they perceive that their peers are doing similarly.3
There is growing acceptance among regulators and risk managers that culture shapes conduct in banking. However, it is often argued that culture is “soft stuff” that cannot be measured, and that, consequently, it cannot be managed. It is also often presumed that, since “culture” is not restricted to specific individuals, it cannot be changed.
But our work using network methods in settings around the world suggests quite the opposite.
Network science offers a number of models for diagnostic techniques and behavior-change interventions for the financial industry.
With adequate information about both the structure of employee interactions (e.g., by studying email communication patterns in a manner that we have validated) and information about any known cases of bad behavior, it is possible to ascertain whether there are outbreaks of such behaviors and whether there is evidence of social contagion. More generally, network methods can help identify clusters of employees at greater risk of succumbing to such contagion.
Perhaps more important, it is possible to use network methods to implement interventions that will drive change in the culture within banks, even absent any known bad behavior, and to affirmatively manage conduct risk. This can be done in two ways.
First, by understanding the structure of employee interactions, it is possible to target “inoculations” (in the form of trainings, enforcement actions, or other management interventions) on individuals or groups who, by virtue of their network location, have an outsized impact on the culture within the firm. Such individuals are not necessarily ones identified by a formal org-chart.
Second, and distinctly, the structure of the network itself might matter. An analogy is helpful. If one takes a group of carbon atoms and connects them one way, one gets graphite, which is soft and dark. But if one takes the same carbon atoms and connects them another way, one gets diamond, which is hard and clear.
There are two key ideas here. First, these properties of softness and darkness and hardness and clearness are not properties of the carbon atoms: they are properties of the collection of carbon atoms. Second, the properties one gets depends on how we connect the carbon atoms together
It’s the same with social groups. This phenomenon, of wholes having properties not present in the parts, is known as “emergence,” and the properties are known as “emergent properties.” Culture within firms operates similarly, and is itself an emergent property with implications for employee behavior: connect employees in one way, and they do not engage in risky conduct. Connect them another way, and they do.
Those hoping to drive improved conduct in the Australian banking sector would do well to keep these learnings from the behavioral sciences in mind as they begin their reform efforts
Nicholas A. Christakis, MD, PhD, MPH, directs the Human Nature Lab at Yale University and is co-director of the Yale Institute for Network Science. With James H. Fowler he authored, “Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives.” His latest book, “Blueprint: the Evolutionary Origins of a Good Society,” was released this month.
First published on Thomson Reuters Regulatory Intelligence (TRRI) on 2.13.19