What Does It Take?

JPMorgen’s recent loss of two billion dollars embarrassed a bank that has been vigorously claiming that rules to restrict trading are not needed.  But it also casts doubt on a settled conviction in the financial industry that risk can be managed.

“Even at a bank as ostensibly well-run as JPMorgan, the incentives still exist for giant, risky bets to be made that can go very wrong,” wrote Joe Nocera, a business reporter for The New York Times.  It’s significant that he used the adjective “risky,” suggesting that risk is a condition to be explored not a thing, ”risk,” to be understood.  Any bet has some degree of risk, and requires constant vigilance and self-scrutiny to assess when that condition may arise.  (See, “When Will They Learn?”)

Some of the more objective factors that make for risky bets can be quantified.  Previous performance of comparable investments can be tracked.  Volatile markets can be measured.  But there is also an irreducible element of subjectivity in making such judgments, and to be vigilant about subjective error requires, among other things, a kind of skepticism about one’s motives.  If you want something a lot, you will want to believe that it is possible to get it, and that desire will inevitably skew your judgment.

And competition and pride may well be driving you to want it, as well as ambition and the craving for self-esteem and status.

In general, banks are not that good at scrutinizing their motives, reflecting does not come naturally to them.  We learned that during the credit crisis of 2008, when they got caught up in the mania of the credit bubble.  That’s why rules are essential.

Returning from the Trojan War, the Greek hero Odysseus knew that he would be sailing near the treacherous rocks where the fabled Sirens sang.  Eager to hear the beautiful and seductive songs that had lured countless ships to their destruction, he had his sailors lash him to the mast with instructions not to untie him, no matter how much he thrashed about or cajoled them.  He filled their ears with wax so they would not be tempted themselves, and so they would not hear the pleas and threats he knew he would resort to in order to get closer to the alluring music.  They obeyed the rule he imposed, he got to hear the Siren’s songs – and they all survived.

“Wily Odysseus,” as he was known, was smart enough to know the limits of his own judgment, smart enough to know when he himself could not be trusted to follow it.  Jamie Dimon, the CEO of JPMorgan has been cajoling, wheedling and pushing to remove the rules that would have prevented their two billion dollar loss.  He doesn’t seem to have changed his mind.

We don’t need to go back 3,000 years to find compelling examples of good judgment.  But our history does not offer many examples of leaders who willingly embrace their own limits.