Is human nature the flaw in our financial system?

“There are three ways to make a living in this business: be first, be smarter, or cheat”.

The film Margin Call gives an insider’s look into this unknown Wall Street firm and reveals the human nature of it and the distressing aspect regarding the emotions that drove decisions. The plot really narrows down to an accommodation of factors including; people who were gambling, people who were taking advantage of deregulation and people who were all about the short term rather than the long gain.

I ask the reader, what is the role of emotions in financial decision-making? Do emotions effect how decisions are made? This echoing theme throughout the film explicitly sets out to examine how our emotions, both those which are conscious, and more importantly, those unconscious, play a key role in financial decision making. To me, it seems to be apparent in Margin Call indefinitely as we see how the senior management prepare to do whatever it takes to mitigate the debacle to come even. The reality is, the company held a massive position in an illiquid market, decided to stop chasing profit and were lucky to have cut their losses. At times we find ourselves rooting for the firm's survival despite the fact that its executives are actively promoting worthless assets.

What I found to be a little unrealistic about the movie was the fact that they were able to accomplish the unloading of these illiquid positions as cleanly as they did. In a semi-strong market, you’d assume that regulators would identify this flaw in the formula, although it can be argued that regulators can have an oversight of the big picture here, which relates to my blog regarding Bernard Madoff’s scam. 

Were they acting in the best interest of the shareholders, or even themselves? Most certainly there is a clear indication for delivering shareholder value, although I’d argue at what cost. The bank had insider information regarding its flawed formula and refused to let it bring the company down. Was the bank wrong to sell off its worthless assets? I’d argue not, they’ve implemented a hedge strategy to save their own company from extinction. Ultimately, you’re selling something that you *know* has no value, but quite correctly you are selling to ‘willing’ buyers at the current fair market price. Although the economy may suffer, it’s the markets late reaction, not necessarily the company’s inside knowledge. After all, staying alive is animal instinct, it’s a dog eat dog world. Its human nature to survive, which is why I believe emotions were the basis of decisions making.

On the other hand, could shareholder value be destroyed from potentially losing all their current and future customers from a ruined reputation? The firm may survive from this although they’ll destroy their reputation at the very least, whilst also destroying the economy. One could argue that had they not taken the initiative to sell off their junk, someone else would have. This brings me back to this idea of ‘one man’s gain is another man’s loss.’ The underlying issue here could be the corporate culture of the company, which relates back to my second blog.

The ultimate unsatisfying conclusion of Margin Call is that there may be no final fix for the problem; that, to a large extent, the financial crises is unavoidable and will continue to happen in any economy that resembles free market capitalism. The message is conclusive: Human nature does not change and the crisis will happen again. The question is not whether we should reform our financial and economic system to prevent another crisis. The question is whether we can at all.