The Big Short Explains Why Smart People Act Stupid in Business

Last night, I rewatched “The Big Short (TBS),” a film that brilliantly dissects the 2008 financial crisis. As I watched, it struck me how this movie perfectly illustrates why even the smartest people in large organizations can make disastrously poor decisions. Let’s take a look at the systemic, cultural, and psychological factors at play.

1. Cognitive Biases and Conformity

In TBS, we see highly intelligent individuals like investment bankers and financial analysts succumbing to cognitive biases. Richard Thaler and Daniel Kahneman, who both appear briefly in the film, have extensively studied these biases.

Overconfidence, anchoring, and groupthink clouded the judgment of the financial experts. The film’s protagonists, who spotted the housing bubble, faced ridicule and disbelief—classic symptoms of groupthink and conformity.

Remember how Michael Burry, played by Christian Bale, identified the housing market’s fragility? Despite his accurate analysis, he faced enormous pushback because his conclusions deviated from the group consensus.

Takeaway: Encourage open dialogue and dissenting opinions during meetings. Consider anonymous feedback tools to gather honest input.

2. Bureaucracy and Siloed Thinking

TBS also highlights how bureaucratic structures and siloed departments can stifle innovation and slow down decision-making. Roger L. Martin’s concept of integrative thinking is crucial here. In the film, various departments within financial institutions operated in isolation, failing to see the interconnected risks.

When Mark Baum’s team, portrayed by Steve Carell, tried to expose the flaws in mortgage-backed securities, they encountered resistance from different sectors of the financial system, each operating in its bubble.

Takeaway: Facilitate cross-departmental collaboration through regular interdepartmental meetings and collaborative projects.

3. Short-term Focus and Incentive Misalignment

Corporate environments often prioritize short-term gains over long-term stability, a theme painfully evident in TBS. The financial crisis was exacerbated by incentive structures that rewarded immediate profits, regardless of long-term consequences. Naseem Taleb’s idea of antifragility suggests that systems should be built to withstand and benefit from shocks and stresses, not crumble under them.

Wall Street’s obsession with short-term profits led to reckless behavior, like selling risky mortgages bundled into seemingly safe securities. This short-term focus compromised future stability and led to catastrophic losses.

Takeaway: Align incentive structures with long-term goals and innovation. Reward risk-taking and learning from failures.

4. Resistance to Change and Hierarchical Culture

John P. Kotter’s principles of change management are vividly illustrated in the film. The entrenched, hierarchical culture of the financial sector resisted any suggestion that the housing market was in trouble. Those who tried to raise alarms were often dismissed or silenced.

Jared Vennett, played by Ryan Gosling, faced skepticism and resistance when he tried to pitch the idea of shorting the housing market. The hierarchical structure of the banks made it difficult for radical ideas to be heard and acted upon.

Takeaway: Create a safe environment for employees to voice concerns. Implement regular feedback sessions and anonymous suggestion boxes.

5. The Power of Narrative and Storytelling

Malcolm Gladwell and David Ogilvy emphasize storytelling’s power in changing culture and aligning incentives. TBS itself is a masterclass in storytelling, using humor and accessible explanations to convey complex financial concepts. This approach can be a powerful tool within organizations.

We’re talking about it now in this post, right?

The film’s use of celebrity cameos to explain financial jargon in layman’s terms made the story engaging and memorable, helping audiences understand the gravity of the situation.

Takeaway: Use storytelling to highlight successes and lessons learned. Share these stories in company newsletters and meetings.

6. Aligning Organizational Goals with Personal Fulfillment

Naval Ravikant’s ideas about aligning organizational goals with personal fulfillment are relevant here. When individuals see their work as meaningful and aligned with broader goals, they are more engaged and motivated. The protagonists in TBS were driven not just by profit but by a desire to expose the truth and prevent a catastrophe.

The team at Cornwall Capital, led by Charlie Geller and Jamie Shipley, pursued their shorting strategy because they believed in its correctness, despite facing ridicule and isolation.

Takeaway: Encourage employees to pursue passion projects that align with organizational goals. Offer professional development opportunities that support their growth.

7. Navigating Corporate Politics

Robert Greene’s insights on power dynamics and strategy are crucial for understanding internal machinations. The film portrays the complex political landscape within financial institutions, where navigating alliances and power plays was essential for getting things done.

Ben Rickert, played by Brad Pitt, used his connections and understanding of corporate politics to help Charlie and Jamie execute their trades successfully, despite the industry’s opposition.

Takeaway: Train employees in strategic networking and influence techniques. Encourage cross-departmental alliances and collaboration.

Here’s a holistic approach to address poor decision-making in large organizations:

  • Bias Awareness Training: Regularly train employees on cognitive biases and decision-making traps.
  • Change Coalition: Form a guiding coalition of influential leaders to drive cultural change and effectively communicate the vision.
  • Integrative Thinking Sessions: Organize cross-functional brainstorming sessions to foster innovative problem-solving.
  • Compelling Narratives: Use storytelling to highlight successful decision-making examples and inspire cultural shifts.
  • Flexible Frameworks: Develop adaptable decision-making frameworks that encourage experimentation and learning.
  • Personal Growth Programs: Implement programs supporting employee autonomy, mastery, and purpose.
  • Strategic Networking: Train employees in strategic networking and influence techniques to navigate corporate politics effectively.

By addressing these systemic issues, through a comprehensive approach that addresses cognitive biases, bureaucratic structures, incentive misalignment, and more, organizations can foster a culture of smarter decision-making.

Here are some book recommendations that provide a comprehensive understanding of the systemic, cultural, and psychological factors that influence decision-making in large organizations, offering practical insights and strategies to improve organizational effectiveness.

Cognitive Biases and Decision-Making

1. “Thinking, Fast and Slow” by Daniel Kahneman

– Explores the two systems of thought and how cognitive biases influence decision-making.

2. “Nudge: Improving Decisions About Health, Wealth, and Happiness” by Richard Thaler and Cass Sunstein

– Discusses how small changes in choice architecture can significantly impact behavior.

Bureaucracy and Integrative Thinking

3. “The Opposable Mind: Winning Through Integrative Thinking” by Roger L. Martin

– Introduces the concept of integrative thinking and how leaders can synthesize opposing ideas.

4. “Reinventing Organizations: A Guide to Creating Organizations Inspired by the Next Stage in Human Consciousness” by Frédéric Laloux

– Explores new organizational models that break away from traditional bureaucratic structures.

Short-term Focus and Incentive Alignment

5. “Antifragile: Things That Gain from Disorder” by Nassim Nicholas Taleb

– Explains how systems can benefit from volatility, uncertainty, and stress.

6. “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” by Clayton M. Christensen

– Examines why large companies fail to innovate and how to overcome these challenges.

Change Management and Hierarchical Culture

7. “Leading Change” by John P. Kotter

– Provides a comprehensive framework for leading successful organizational change.

8. “Drive: The Surprising Truth About What Motivates Us” by Daniel H. Pink

– Explores the elements of true motivation and how they apply in the workplace.

Power of Narrative and Storytelling

9. “The Tipping Point: How Little Things Can Make a Big Difference” by Malcolm Gladwell

– Discusses how small changes can create tipping points that lead to significant impacts.

10. “Confessions of an Advertising Man” by David Ogilvy

– Shares insights and stories from one of the most influential advertising men, emphasizing the power of storytelling.

Aligning Organizational Goals with Personal Fulfillment

11. “The Almanack of Naval Ravikant: A Guide to Wealth and Happiness” by Eric Jorgenson

– Compiles the wisdom of Naval Ravikant on pursuing personal fulfillment and aligning it with professional goals.

12. “Flow: The Psychology of Optimal Experience” by Mihaly Csikszentmihalyi

– Explores the concept of flow and how it leads to happiness and fulfillment in both personal and professional life.

Navigating Corporate Politics

13. “The 48 Laws of Power” by Robert Greene

– Offers insights into power dynamics and strategies for navigating corporate politics.

14. “Influence: The Psychology of Persuasion” by Robert B. Cialdini

– Discusses the principles of persuasion and how they can be applied effectively in business.

IQ, meet EQ.

Ultimately, “The Big Short” serves as a stark reminder that intelligence alone isn’t enough to prevent disastrous decisions. It’s about fostering a culture that values critical thinking, collaboration, and resilience. Only then can we avoid the pitfalls that even the brightest minds fall into.

By Paul Syng

Paul Syng is a multi-disciplinary designer based in Toronto. He focuses on a problem-seeking, systems thinking approach that can take any form or function.