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10:34 AM
Andrew Waxman
Andrew Waxman
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Motivating Traders to Think Beyond Themselves

Banks need to make traders more aware of their inter-connectedness with the lives of the people who support them in control functions, so that they think twice about the risks they take on.

The work of Adam Grant, the youngest tenured professor at Wharton, was profiled in Sunday’s Sunday Times Magazine, can be summarized in the following sentence, “the greatest untapped source of motivation is service to others; focusing on the contribution of our work to others peoples’ lives has the potential to make us more productive than thinking about helping ourselves”. (Sunday Times Magazine, March 31 2013, p.22). It may seem counter-intuitive to argue that this is part of the future key to success for investment banks, where as long as anyone can remember, “greed is good” has been the path to success. However, in its broadest sense, what the statement is talking about rings true: employees want meaning in their lives, so why not give it to them in the work place.

Grant’s research shows that when workers understand how their work can benefit others they become more effective. An early piece of Grant’s research, according to the Sunday Times article, focused on a university call center raising funds, for, amongst other things, university scholarships. Grant brought in a student who had benefited from that fund raising to speak for 10 minutes to the call center workforce about the impact that the scholarship had had on his life. A month after the testimonial, the workers, according to the article, were spending 142 per cent more time on the phone and bringing in 171 percent more revenue. These results were repeated in subsequent studies obviously tapping into a desire people have to help others.

The steps that many firms have already taken to encourage their employees to give back to society is strong evidence that firms have been attempting to take advantage of this source of employee motivation. It is now part of the normative culture of investment banks to ask employees to give a certain number of hours to community projects and then keep a table of hours given by line of business/function to tap into the competitive spirit of bank employees. However, giving time and money is still only at the margins of employee activity. There is more than can be done to make employees change the way they perform their core functions. Here are some examples of what we’re talking about here.

For the first example, let’s think about the chain of events caused by a trader taking risks beyond the mandate he has been given. Let’s say he exceeds his risk limits, once, and requests a temporary increase in his limit. The limit is exceeded once again, and leads ultimately to a significant loss for the firm. Let’s say, however, that this is a trader who has been very successful in the past and the loss is chalked up to bad luck, unlikely to be repeated. No action is taken against the trader though risk managers at a more junior level have pointed out the concern to senior management.

Six months later, the same trader swings the bat on another trade, again only informing risk managers after the event. This time he manages to make a large profit. Again, no action is taken and the trader reduces the position back to within the limit after a three-day period. Three months later, however, the same trader is in action again and this time makes a huge loss for the firm. As a result, the firm makes a loss for the quarter and the year. As a result people lose their jobs, including folks in operations and risk, who had not been making decisions about these trades.

For the second example, let’s think about the chain of events caused by a failure to enforce anti-money laundering controls. As a result of these failures, drug gangs are able to launder money through the Mexican branch of your bank. With the money they now have, they are able to increase the size of the operation and buy arms for their internal security division. The increasing effectiveness of their operations enables the gang to reduce its price to the middle men selling the drugs in Manhattan. As a result of the price decrease, drugs become more affordable to a wider range of consumers in the United States, and so usage increases. With increasing usage, social dislocation in urban areas grows ever worse, more children of drug addicts, on the streets etc.

[Finding Alpha in the New Normal]

Taking the lead from Grant’s research, perhaps, by educating employees about the implications of their actions, firms can tap into a deeply held desire to do the right thing, in this case, to manage risk more effectively. In the case of the risky trades, if the trader can be made aware that more than just the size of his bonus is riding on the success of his trades, but rather that there is a whole inter-connectedness between traders and the lives of the people who support and manage the control functions, maybe traders would think harder about the risks they take on.

Similarly in the case of money laundering, perhaps by teaching bank employees about the lives of inner city children and the effects of drugs on home life, crime, the breaking of family and community bonds, they would bring more passion and focus to the task.

Well that sounds simple enough. Just tell people that what they do will help other people in specific ways – to keep the jobs of people at the firm, who are supporting their children through school, for example, or to help the children of vulnerable parents in inner city areas, and they will do their jobs more effectively. Not quite that simple unfortunately.

People may be educated into wanting to do the right thing but they still may be stymied from doing so unless the organization enables them to do so. Effective risk management must also be concerned with organizational design. More on that in a future column.

Andrew Waxman writes on operational risk in capital markets and financial services. Andrew is a consultant in IBM's US financial risk services and compliance group. The views expressed her are those of his own. As an operational risk manager, Andrew has worked at some of the ... View Full Bio
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