Ending the management illusion: Preventing another financial crisis

This is an Ivey Business Journal article by Hersh Shefrin that provides a very interesting perspective on the current financial crisis. While this is interesting in itself, there are many parallels here with other failures of governance, including IT governance – in fact, particularly on the first page, if you drop the word “financial”, what Hersh is presenting is that governance failures all too often result from our failure to understand the need to both recognize and change human behaviour. A few (slightly restructured and “de-financialed”) quotes:

“The root cause…is the psychological excess that was manifest in unsound managerial judgement and poor managerial decisions…much of that excess was preventable….going forward, we need to figure out how to deal with our self-destructive elements. We need to learn how to build organizations that are psychologically smart. We need to structure organizational cultures that foster sensible approaches to risk-taking…the starting point is to face up to a major management illusion…the belief that organizations can ignore psychological obstacles to effective decision-making, and yet succeed in the long-run without being lucky…addressing psychological obstacles effectively requires the development of a co-ordinated, integrated approach…setting clear goals. It means:
  • planning with a view to execution and the achievement of goals;
  • putting in place a balanced mix of financial and non-financial incentives which reward members of the organization according to how well goals are met;
  • excelling in the sharing of information about whether the organization is track in carrying out its plans, achieving its goals, and rewarding its members.
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