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Models, morals and management

Financial Services Faculty Risk and Regulation Technical Manager John Mongelard speaks to Daniel Beunza, Associate Professor at Cass Business School and author of new book, Taking the Floor.

The Faculty was lucky enough to spend some time with Daniel Beunza. He recently won the 2020 George Terry Outstanding Book Award by the Academy of Management.  The Academy represents management academics globally and judged his book to have made the most outstanding contribution to the global advancement of management knowledge during the last two years.  

This had followed Daniel’s win of the 2020 Best Book Award by the European Group on Organisational Studies. It is no surprise, having read Daniel’s book, as his ideas are fresh and thought-provoking.  

Daniel takes his anthropological lens and applies it to the most testing of environments, the trading floor, and looks at what lessons can be learnt. There are many books that look at management approaches but how many stand up to empirical testing and provide practical examples of what to do in the most difficult of circumstances. 

His 2019 book looked at the context of bank lobbies, many scrawled with the bank’s ‘values’. The book looked at whether these values carried on, past the lobby turnstiles. His work noted that on many trading floors the key control is the VAR (Value At Risk) model. These models look at expected losses on traders’ positions and is the main mechanism through which investment banks seeks to balance the risks across the bank. Where necessary, they are used to direct traders to reduce their positions. The models are praised by some as they ostensibly offer a degree of neutrality and might help to avoid individual trader biases.  

However, Daniel noted that models are an imperfect form of control and those imperfections will create a sense of injustice and then lead traders to morally disengage.  

  • Traders spend a lot of time either analysing VAR and/or show its weaknesses. Daniel therefore highlights an approach where models and their outputs might be ignored. This might be bad news for our Risk function and the three lines of defence model that regulators love. 
  • An innovative trade will sometimes generate early losses but revert to profit in a familiar hockey stick manner, proving lucrative overall. But the early VAR numbers could show loss and the Risk function would then demand the trader closes that position. But that early closure will of course guarantee a loss. 
  • These more mechanistic controls like VAR and Compliance units will very often unfairly constrain behaviour and this will generate staff perceptions of injustice.  
  • The models also link to bonuses but Daniel notes how subjective compensation models lead to feelings of organizational injustice and good traders quitting. 

We can’t possibly do Daniel’s book justice here but if you do want to dip a toe or more then please listen to our recent conversation.

This webinar looks at: 

  • At how you understand the starting position of your firm’s culture. 
  • What training is required to support an echo from the bottom, to the tone and values at the top. 
  • How instead of models, good managers rely on regular conversations with traders and their explanations. 
  • How instead of subjective bonuses, fixed percentages of profits can work better.