Dunfermline Building Society - irrational incentives?
Robert Peston reports that Dunfermline Building Society is going to be taken over by Nationwide, and asks "why Dunfermline took such risks that ultimately cost the society its independence". Here's an article with a bit more detail about the story and what happened. I haven't been able to find out whether management were incentivised with highly leveraged short-term bonuses, but given that this is a Scottish building society, the obvious assumption is that they were not. So why would they take such huge risks? The answer surely is that they did not knowingly do so; but that they felt a pressure to chase profits and closed their eyes to the risk that usually goes with high returns. The pursuit of high profits is ingrained in the behaviour of managers even without financial incentives. This could be seen as a social pressure to keep up with the next guy; a psychological pressure to be the alpha male; or a boundedly rational economic decision based on an inaccurate est...