Banking’s ethical blindspot – why the brain’s to blame

brain-vs-guts

One in five UK and US financial services employees believe they or their colleagues must at least sometimes engage in illegal or unethical activity to be successful. If you’re thinking that statistic dates back to 2008/09, at the height of the global financial crisis, think again. This pulse check was taken in May of this year, part of a University of Notre Dame study into the state of ethics within the banking sector.

Seeking ethical views from over 1200 professionals working in financial services across the United States and the United Kingdom, it also uncovered a stark shift in generational attitudes towards ethical dilemmas. Employees with less than 10 years in the finance sector said they would likely engage in insider trading to make $10 million if there was no chance of being arrested, more than twice the figure for employees with over two decades in the industry. With such frightening insights into the attitudes of those we entrust our life savings to, we might well ask – what does the future hold?

All over the world, regulators, banks and consumers are grappling with this very question. And while there are a myriad of factors to consider when trying to find an answer, a new starting point might in fact be our brains, and the silent ways they are working against us when it comes to acting ethically.

Rewiring our decision pathways

In 2003 a group of researchers released an article in the Harvard Business Review discussing the role of unconscious and implicit biases in our decision making. The same unconscious, automated and reductive decision making processes that has helped us survive as a species thus far, they argued, was also at the root of our unethical decision making. The brain wiring that had helped us ‘instinctively’ avoid dangerous predators and predict weather patterns, allowed us to make quick decisions with reduced information, using assumptions built up over time, was also colouring the way we hired, promoted diversity, interacted with our customers and did business. Banking of course, is no exception. In fact it may be victim to these unconscious biases on a far greater scale than many other industries.

The smartest of us think without thinking. We often wear our ‘gut instincts’ like a badge of honour. But would we continue to do so if tests uncovered we were personally guilty of more unconscious biases than we cared to realise? Faced with the stark facts science has bought to the table, we need to start taking steps towards a radical rethink of conventional decision making. One thing is for sure, if the statistics mentioned earlier are anything to go by, the banking sector cannot afford not to.

Below I outline four unconscious factors that are at play in unethical decision making, and how they are potentially playing out in the banking space.

4 hidden biases that have shaped banking

Implicit bias – bias that emerges from unconscious beliefs

By in large, the financial services sector seeks out smart, well educated people, from the sorts of institutions that have turned out some of the worlds greatest thinkers, leaders and academics. Recruitment teams from leading investment banks are known to fly around the world to find the best talent, recruiting from Ivy League universities and top-tier MBA cohorts. It seems evident banks are consciously trying to hire the best and the brightest, the most diverse. But could they unconsciously be excluding equally qualified candidates from less elite backgrounds? More than likely yes. Is there an unconscious bias that suggests those from wealth are best placed to manage wealth? And what does this mean in terms of representation of the less well off in the major banks deal making rooms?

In-Group Favouritism – bias that favours your group

As the familiar saying goes, ‘it’s not what you know, but who you know’. And while there’s often much good that comes out of helping your network of friends and colleagues, it can cloud decision making. In banking, that can lead to skewed lending patterns and dominant gender groups occupying senior management positions. So while banks may feel like they’re ticking the anti-discrimination boxes, are they also displaying active favouritism to certain customer groups? As the HBR authors indicate, it’s a subtle but crucial distinction.

Overclaiming – bias that favours you

How many bank employees sell products to consumers for which they know nothing about? Or worse, believe they understand them but really don’t at all? An unconscious process known as overclaiming is believed to be at play here, which can develop over time and is also linked to narcissistic tendencies. Could overclaiming also be at the heart of bank employees believing the success of their customers is far more due to their skill than basic market fundamentals? It could explain the disregard many banks have had for their clients and the astronomical fees they’ve felt justified in charging.

Conflict of interest – bias that favours those who can benefit you

Despite our best intentions the study indicates, ‘numerous psychological experiments show how powerfully such conflicts can unintentionally skew decision making’. Situations that foster conflicts of interest, such as compensation and bonus schemes, personal relationships within the workplace and a divergence of interests between a customer and their bank can make, ‘it impossible for individuals to see the implicit bias in their own flawed recommendations’. We don’t accept our doctors receiving kick-backs from pharmaceutical companies for prescribing us medication. So why would we accept our financial planner receiving a similar reward from a bank for selling us a particular financial product? Or an investment bank actively betting against its clients in the market?

While we may consciously believe we act fairly towards our colleagues and customers, scientific studies ‘routinely expose counter-intentional, unconscious biases’.To fix banking’s ethical dilemma, we must learn to question our gut, not blindly follow it. And while it might be easy to say ‘don’t blame the banker, blame the brain’, the reality is we can overcome these unconscious biases with a little hard work and closer scrutiny.

Ethical questions are rarely clear-cut, and ethics within banking is becoming even more grey, as we stamp out explicit forms of bad ethical behaviour and discrimination. To quote Rod Bolger, Senior Vice-President, Finance & Controller at the Royal Bank of Canada, part of a recent EY report into ethical blindspots, the greyer ethical issues become, the more important it is to challenge our thinking patterns.

“It’s on each individual to be vigilant about our blindspots,” he says. “Not just the ones that close our minds to possibilities, but in equal measure, we must resist the urge to favor those with whom we share a connection – the same school, the same race or culture, the same social circle. We have to challenge ourselves to resist the power of these natural affinities.”

So if you work in financial services, banking or fintech, I challenge you to stop and think twice today about the ways unconscious bias might be creeping into your decision making. Challenge your gut. You might just surprise yourself, to the betterment of banking.


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