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The Big Short – how our decisions are nudged

When faced with a decision, we all believe we are weighing the facts objectively and making rational, thoughtful decisions.


Source: www.economist.com

In fact, science tells us that in situations requiring careful judgment, every individual is influenced by his or her own biases. The outcome of this collective irrationality is explored in the movie ‘The Big Short‘.  The film makes the subprime mortgage crisis of 2008 into a study in human greed and irrationality.

The film has a cameo, in Las Vegas, with Professor Richard Thaler and Selena Gomez, in which part of the complicated financial engineering –CDOs – is explained simply.  He explains that people do not like thinking about bad things so they underestimate the probability that they will happen.

Overconfidence is the mother of all biases.

We watch as bets on a roulette table are accompanied by side bets on the main players and further side bets with everyone believing that they are a winner.  Well, no need to explain how that turns out.

At least the world was taught such a severe lesson, with trillions lost from the economy and millions of people losing their jobs,  that it will never be allowed to happen again. Sadly no. The film ends with the launch of a new CDO type financial instrument – the bespoke opportunity tranches – in 2015.

People often make poor choices and look back at them in bafflement. After the CIA backed invasion of Cuba in 1961 – a US foreign policy disaster – Robert Kennedy is reputed to have asked “how could we have been so stupid”.

Conventional economics assumes that people are super-rational and unemotional. Nothing has really changed.  Regulation and governance reforms will not have the slightest impact unless managers in finance and elsewhere understand the limitations of the judgments on which they rely.

People are rationalizing rather than rational.

The very latest behavioural decision research examines judgement in a variety of managerial contexts and provides important insights that can help make better managerial decisions.  Professor Thaler, who teaches at the Booth Business School in Chicago University, is the co-author of a great book on decision making Nudge: Improving decisions about health, wealth and happiness.

It is no surprise that the Christian Bale character who saw through the financial engineering by US banks was a neurologist by training.  Decision-making, persuasion, influencing and negotiation are key skills for managing effective systems and organizations.

Executive education must incorporate these aspects as fully as finance and operations to avoid further meltdowns of our society.


PD and Trainer - Andrew McLaughlin1

Andrew McLaughlin is the programme director of the IMI Diploma in Organisational Behaviour which includes modules on decision-making, negotiation, influencing and persuasion. 

He is an experienced executive coach who has worked with national and multi-national companies including Revenue Commissioners, Departments of Industry and Commerce and Defence, OECD and EU. 

Andrew is also a Master Practitioner and certified trainer / consultant of Neuro Linguistic Programming.

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