Posted by: Nicholas Davis | March 16, 2009

When good goals go bad OR Goals gone wild!

Further to my previous post that compared “stretch goals” to “opportunistic preparedness”, Paul Kedrosky points out an interesting paper out that looks at how goals could potentially influence excessively risk-taking or even ponzi-esque behaviour (à la Madoff). An example they use is the events leading up to the collapse of Continental in 1984:

“An excessive focus on goals may have prompted the risk-taking behavior that lies at the root of many real-world disasters. The collapse of Continental Illinois Bank provides an example with striking parallels to the collapse of Enron and the financial crisis of 2008. In 1976, Continental’s chairman announced that within five years, the magnitude of the bank’s lending would match that of any other bank. To reach this stretch goal, the bank shifted its strategy from conservative corporate financing toward aggressive pursuit of borrowers. Continental allowed officers to buy loans made by smaller banks that had invested heavily in very risky loans. Continental would have become the seventh-largest U.S. bank if its borrowers had been able to repay their loans; instead, following massive loan defaults, the government had to bail out the bank.” Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal-Setting Lisa D. Ordóñez et al.

Until WaMu last year, Continental was the last major bank to be deemed “too big to fail” and hence bailed out by the US Government… maybe we need to replace goal-setting and profit-targets in banks with other forms of motivation?

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