The 2008 Wall Street Crash: A Failed Organizational Response to Complexity

DOIhttp://doi.org/10.1111/basr.12129
Published date01 December 2017
Date01 December 2017
The 2008 Wall Street Crash: A
Failed Organizational
Response to Complexity
RICHARD H. HERBERT
ABSTRACT
In the period since the 2008 Wall Street crash, little con-
sensus has emerged on its causes or actions to prevent a
recurrence. Our capability for rational decision making
was overwhelmed. Viewing the entire financial system as
a huge, richly interconnected organization suggests that
its structure and associated management practices are
suited for a far simpler environment. An organization that
is large relative to its environment and sufficiently com-
plex to require the coordination of specialized expertise
cannot function by enabling decision makers to respond
only to local demands. The resulting inability to recognize
critical interdependencies and the nature of their risk
makes periodic catastrophic failure likely. Specifically,
compartmentalization of information, influence, and
reward creates a myopic decision environment in which
individual decision makers are unlikely to make effective
or ethical decisions. Useful criteria for evaluating solu-
tions can be suggested by considering the interaction of
two factors: limited human information processing capa-
bility and the effect of motivation on information
Richard H. Herbert is Visiting Associate Professor of Business Administration at Washington
and Lee University, Lexington, VA. E-mail: herbertr@wlu.edu.
V
C2017 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by
Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington
Road, Oxford OX4 2DQ, UK.
Business and Society Review 122:4 507–529
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processing. Taken together, they suggest that human
information processing is both limited and opportunistic.
We cannot process all information available and the infor-
mation selected for processing narrows to that needed to
achieve salient rewards. Because of this, the organiza-
tion’s reward practices and their effect on motivation are
a critical variable. Large financial rewards contingent
upon short term, local, simplistic measures inevitably
narrow the focus of decision maker’s attention to a small
part of the system. In contrast, dominant intrinsic moti-
vation is rooted in awareness of, and responsibility for,
broader outcomes. Each type of motivation differs in its
requirements for sharing of information, influence, and
reward. These, in turn, determine the adaptability of the
organization to complexity and change. While this has
significant ethical implications, its logic rests on the limi-
tations of human information processing and motivation.
Aligning human motivation and information flow to the
demands of a complex, turbulent financial environment is
the challenge we must meet to prevent further
cataclysms.
THE MORTGAGE SECURITIZATION CHAIN:
FRACTIONATED MANAGEMENT OF A COMPLEX
SYSTEM
Managing an interconnected financial system as though it
were composed of independent parts courts disaster in
several ways. Directly, it far understates the risk of the
entire system’s failure (Taleb 2007) because interdependencies and
feedback loops are ignored. It also allows obfuscation of risk and
inappropriate reward at each step in the process as independent
decision makers are rewarded for local success that contributes to
global failure. This distorts the capital allocation process that is the
chief function of the financial system. Risk is an essential determi-
nate of market value. The value of a potential return must be modi-
fied by the risk of failure. At the individual level, a distortion of risk
508 BUSINESS AND SOCIETY REVIEW

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