Failures of High Reliability in Finance
Nathaniel I. Bush, Peter F. Martelli, and Karlene H. Roberts
The recent failures and resulting crisis related to mortgage-backed securities and derivatives are symptomatic of deeper organizational problems in the global financial services sector. Both the culture and tools of high finance produce conditions that are inconsistent with high reliability outside a narrow set of system parameters. Using perspectives from high-reliability organizing theory, we review critical features of firm-level and system-level behavior in financial services that reduced overall system tolerance and yielded catastrophic consequences. We assert that overspecialization, control and conformity, insensitivity to unknown risks, and lack of flexibility in response contributed to systemic failure. We analyze industry character to reveal how organizations institutionalized critical design flaws. Moreover, we examine how similar failures within most financial organizations compounded as a result of the highly interconnected nature of the system. Finally, we offer a short list of prescriptions that would improve reliability in the future.
it is difficult to get a man to understand something when his salary
depends upon his not understanding it.
This work was partially supported by National Science Foundation Grant No. CMMI 0624296.