Curing Wall Street
September 19, 2008
Alexandra Michel of the USC Marshall School of Business says that the current hand-wringing about Wall Street — and search for a regulatory cure — is missing a central point.
“We all recognize that the American economy won’t be fixed until Wall Street is in order. But the solutions that have been proposed are mostly regulatory — by themselves an incomplete solution that could lead to future problems,” she says.
Michel is in a unique position to view today’s debacle: The assistant professor of management and organization began her career as a commercial banker at Dresdner Bank in Dusseldorf, Germany, and later worked for Citibank in Paris and for Goldman Sachs in New York.
After earning a Ph.D. in management at Wharton, in 2003 she joined the faculty at USC, where she teaches and researches on how knowledge-based organizations affect — and reflect — the workers they hire.
“Wall Street is one of the most innovative sectors of our economy. Complex financial instruments are being constantly created, and their future impact cannot always be clearly foreseen — which means that regulation cannot predict the new types of troubles that might plague future Wall Street firms,” Michel says.
“Only people in banks who are closest to the decision have a chance to see pitfalls,” she explains, “and that’s why fixing Wall Street is a managerial problem first and foremost.”
Michel believes that to succeed, investment banking firms must train new managers by amplifying uncertainty, which leads to leaders who are more effective in rapidly changing environments.
“In our society, we tend to believe that knowledge workers can better cope with complexity when we decrease their uncertainty and give them the tools they need to become experts,” Michel says. “In contrast, people are often better at complex jobs when they know less. This gives them the incentive to question assumptions and collaborate with others.”
Forthcoming research from Michel shows that reducing worker uncertainty in investment banking ultimately leads to a culture of the self-reliant “individual,” a culture in which expertise is segmented and personal fiefdoms flourish. Feeling confident in their abilities, experts often don’t notice when situations change and their knowledge is no longer applicable.
Such expert cultures have contributed to the “bad bets” that have recently rattled financial markets, resulted in thousands of layoffs and undone venerable institutions, according to Michel.
On the other hand, investment banks that amplify uncertainty through information overload will produce a corporate culture of “organization.” Overwhelmed bankers need to draw on others to do their work, and as a result, the company thrives by constant collective questioning and collaboration.
Given the vagaries of Wall Street, the sudden changes of new technology, the unknown pitfalls of political decisions, and the sheer complexity of international markets, Michel says that investment bankers can’t possibly be definitive experts in every area. “Similar conditions are now present in other industries, and similar conclusions about the management of employee uncertainty apply,” she concludes.
Alexandra Michel’s new book, Bullish on Uncertainty: How Organizational Cultures Transform Participants is forthcoming from Cambridge University Press. The book was co-authored by Stanton Wortham of the University of Pennsylvania Graduate School of Education, based on Michel’s data set. Contact Michel at (213) 740-3360 or email@example.com.