Darwin Awards in Investment Banking

Some 20 analysts from Goldman Sachs and 10 from JP Morgan have been dismissed after it emerged that they were cheating during some mandatory tests during their analyst training program.

As the article says, it is not unusual for bankers to assist each other when it comes to tests in mandatory training and compliance, since they are seen as being time consuming and repetitive.

In that sense, that these guys copied or helped each other is not news. What matters, though, is that they got caught in the process. And that is unacceptable for a banker.

If you look at how investment banking has been shaped over the last decade or so, there have apparently been several people who have fudged stuff – from financial results to key rates to benchmarks, and gotten away with it because they haven’t got caught. And they continue to remain successful bankers.

So in the banking culture, fudging is okay, but getting caught isn’t. By getting caught fudging in tests during their training program, these analysts have betrayed the one skill that is necessary for being a successful banker, and for this reason they have been rightly weeded out.

It’s like the Darwin awards, except that for these guys it is only the end of their careers in banking.

Process

A couple of days back, I was debugging some code. And yes, for those of you who didn’t know, coding is a part of my job. I used to have this theory that whatever job you take, there is some part of it that is going to be boring. Or to put it in the immortal words of a brilliant co-intern at JP Morgan “chootiya kaam”. And in my job, the chootiya part of the kaam is coding. That doesn’t mean that I’m not enjoying it, though. In fact, for the first time in nine years (note that this takes me to a time before I’d started my BTech in Computer Science) I’m enjoying coding.

Coming back, I was debugging my code yesterday. It was one of those impossible bugs. One of those cases where you had no clue why things were going wrong. So I started off by looking at the log files. All clean, and no bugs located. While I was going through them, I got this idea that the strategy sheet might offer some clue as to why things aren’t doing well. Half the problem got diagnosed when I was looking at the strategy sheet. Some problem with cash management.

And when I thought looking at the trades might help. The bug was presently discovered. And then it hit me – that I’d unwittingly followed what seems like a “process”. Everything that I did had been guided by insight and instinct. Yet, the steps that I followed – 1. look at the logs; 2. look at the strategy sheet ; 3. look at the trades – seemed so much a preset process. It seemed to be like one of those things that I’d just ended up reading in some manual and following.

I realize that most “standard processes” that are followed by¬† various people in various places are stuff that were initially not meant to be processes. They were just an imprint of somone’s train of insights. It was as if someone had a series of insights that led to a solution to whta might have been a difficult problem. And then, he realized that this kind of a process could be followed to deal with all such similar problems. And so he wrote down the process in a book and taught a set of people to implement them. The field thus got “fighterized“.

The argument I’m trying to make here is that a large number of so-called “standard processes” are just an imprint of someone’s insight. They just happened to get into place because the inventor noticed this pattern in a bunch of things that he was doing. They need not be the best way of doing what is supposed to be done. Maybe there isn’t even a single best way of doing it that might work every time.

People who are likely to have worked on processes later in their life cycle are likely to have been people who are process-oriented themselves, and given how these kind of people work, it would have been likely that they would have resisted changes that could make the process worse in the short term. They are more likely to have been incremental in their approach. With a succession of such people working on improving the process, the process of refining the process would’ve ended up taking a hill-climbing algorithm and is likely to have ended up in a local maximum.

Once again, the large changes to the process would’ve happened when someone who was willing to take a large step backward worked on them, and it is again likely that such a person would be driven more by insight rather than by process.

My hypothesis is that most processes are likely to have been largely defined by people who are themselves not very process-oriented, and who thus will expect a certain level of insight and discretion on the part of the person implementing the process. And one needs to keep this in mind while following processes. That it would be good if one were to take a critical view of every process being used, and not be afraid to take a backward step or two in process development in order to achieve large-scale improvements.