The Hayne Royal Commission in Australia has upended the central myth of the financial services sector that "greed is good". As if we learned nothing from Gordon Gecko, the central character portrayed by Michael Douglas in the 1987 movie "Wall Street", and by Stanley Weiser in the 2010 sequel. The script is too real to be entertaining any more.
The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released this week, and it presents an eye-watering litany of misdeeds, misappropriations, mismanagement, and missed opportunities for reform. Both business and government leaders appear to have been sitting on their hands while customers were routinely fleeced of their money. How did this become so seemingly normal?
Cognitive BiasIn 2010, German researchers found strong evidence that cognitive bias most likely contributed to the decision making which led to the global financial crisis of 2007-2009. The Hayne Royal Commission report arrives at a similar conclusion that business-as-usual clouded judgement at best, and at worst led to intentional deception.
While the report's recommendations call for regular checks of culture and performance bias, in practice this goes to the heart of how we make decisions, for whom we make decisions, and the context of our decision making. In 2011, Daniel Kahneman, the father of behavioural economics, popularised the idea that we think both fast and slow about problems before we make decisions. He described System 1 thinking as intuitive and quick to make assumptions, while System 2 thinking is rational and calculating and therefore slower. Both systems are subject to bias, particular when our environment is loaded with cues about how we are expected to behave in order to fit in. But is it possible to exert enough willpower to overcome cognitive bias each time we make an important decision?
The Third SystemContrary to Daniel Kahneman, there is a Third System of thinking, which my colleague Dr Barry Partridge and I discovered while researching decision making bias at the University of Wollongong, 2010-2015. System 3 turns out to be slow and calculating like system 2, but it has some of the emotional characteristics of system 1. Depending on the nature of the decision, it seems we first jump to conclusions based on our experience (system 1), then we analyse the problem to rationalise our conclusions (system 2).
However, if the problem is outside our experience, or is intractable, or if we are faced with a dilemma for which there are no clear right or wrong answers, then system 3 kicks in. This is where we "think from the heart" using a first-person perspective to sift the data through our emotions, discern the reality of the various impacts of the decision on others and ourselves, and consider deeply the wider consequences both short and long term.
Our blindness to this Third System of thinking leads us to either make intuitive leaps of faith, or overly rely on analytical tools when confronted with complex problems. Experience teaches us how to use system 1, and business schools train us in system 2 approaches. But there is no training for how to apply the Third System. Japanese business experts, Ikujiro Nonaka and Hirotaka Takeuchi nominated this deficit in training as one of the foremost reasons for the global financial crisis. We have forgotten it seems, to train for wise leadership, and we need it now, more than ever.
Wisdom > EthicsEthics training for business leaders is a necessary but not sufficient prescription when it comes to preventing the kind of ongoing toxicity and corruption unearthed by the Hayne Royal Commission. But it's a system 2 approach to changing corporate behaviour, and so far it hasn't worked, at least not sustainably.
Of greater effect would be training in the Third System of thinking. This is more likely to lead to the type of decision making Aristotle referred to as phronesis, or practical wisdom - the ability to make prudent judgements and take actions based on the reality of the situation, guided by values and morals; to know what is the right thing to do for the right people at the right time. But can practical wisdom be trained?
Yes, it can!
- Pioneer researchers in the field of wisdom psychology, Paul Baltes and Ursula Staudinger from the Max Planck Institute for Human Development in Berlin developed the "Berlin Wisdom Paradigm" in the 1990s and conducted experiments in how to boost wisdom-related performance.
- Howard Nusbaum, Director of the Center for Practical Wisdom at the University of Chicago and his colleagues have been researching ways in which wisdom can be developed in professional and public life since 2007.
- Igor Grossmann, Director of the Wisdom and Research Lab at the University of Waterloo in Ontario, Canada shows how the ability to think wisely varies dramatically from one situation to another, and he presents experimental evidence for ways to buffer thinking against bias.
- And at the Stein Institute for Research on Ageing at the University of California San Diego, Director Dilip Jeste and his team outline 6 components of wisdom, all of which can be developed over time.
Developing the Third SystemThe 9 capabilities of the Third System are:
1. Social Advising
Daniel Goleman popularised the notion of emotional intelligence in the 1990s. It turns out one of the most critical capabilities of the Third System is to recognise your feelings, yet not be overwhelmed by them. Control over emotions is not the same as the absence of emotions but rather having control over the intensity and variation in them, which yields a kind of contentedness.
- Widen your view: Avoid either/or dualities in framing the issue, expand your options.
- Interrogate reality: Find ways of disconfirming your assumptions, check your sources of information.
- Sense what is emerging: Go deeper than immediate emotional reactions, patiently observe the possibilities emerging in the short and long term.
- Enact a way forward: Experiment and prototype possible solutions, take action and learn from each result.
As we have seen this week from the Hayne Royal Commission report, business, community, and political leaders will need to become more sensitive to the total societal impact of their actions. It's no longer enough to justify decisions based on stakeholder sentiment. From now on, business decision makers need to make sure they deliver social as well as economic value. And to do that they will need to become practiced in the Third System of thinking.
Contact me here to book a Wise Decision Making training program for you and your team.