Sunday, October 25, 2009

Bankers compensation

The issue of the appropriate compensation/incentives for bankers is a hot topic given the financial crisis in Ireland and elsewhere. Many people, I suspect, just to want to string 'em up. On a more constructive note it is worth asking what behavioural economics & psychology can tell us about how bankers respond to incentives. This paper is a contribution to addressing that question.

Banker compensation and confirmation bias.
Sabourian, H. Sibert, A.C.
Confirmation bias refers to cognitive errors that bias one towards one's own prior beliefs. A vast empirical literature documents its existence and psychologists identify it as one of the most problematic aspects of human reasoning. In this paper, we present three related scenarios where rational behaviour leads to outcomes that are observationally equivalent to different types of conformation bias. As an application, the model provides an explanation for how the reward structure in the financial services industry led to the seemingly irrational behaviour of bankers and other employees of financial institutions prior to the credit crisis of that erupted in the summer of 2007.


Tom O'C said...

Had problems downloading this paper. So, can't comment on content.
I just finished Shane Ross's new book on the bankers & was musing a bit myself on the topic at

Along with Alan Greenspan,I just can't reconcile how much the bankers themselves lost?

Kevin Denny said...

Try this Tom