Using Social Influence to Prevent Excessive Risk-taking Among Financial Market Professionals

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Early action by managers and educators can build awareness of excessive risk and its consequences among financial professionals and help to protect them from moral hazard, new study finds

More than $2 trillion was wiped from the world’s economy in the Global Financial Crisis during the pre-recession peak in the second quarter of 2008 and the low hit in the first quarter of 2009, which triggered the worst economic downturn since the Great Depression of 1929. Excessive risk-taking by global financial institutions is widely regarded as a key factor in the crisis and much attention has been paid to the role of corporate reward schemes, bonuses and other incentives in promoting a culture of risk-taking among financial professionals. While researchers have found that such schemes can contribute to excessive risk-taking, the wider social and psychological mechanisms by which such behavior is spread and amplified in a professional context have remained largely unexplored.

However, a new study by Chinese University of Hong Kong (CUHK) has revealed that the risk preferences of aspiring financial market professionals can be strongly influenced by an authority figure who pressurises them to behave in a particular way (obedience pressure) or to socially conform with their peers (conformity pressure).

Excessive risk-taking by global financial institutions is widely regarded as a key factor in the crisis.

The study, entitled Social influence pressures and the risk preferences of aspiring financial market professionals, was conducted by Desmond Tsang, Associate Professor and Acting Director of School of Hotel and Tourism Management at CUHK Business School, and Co-Director of its Centre for Hospitality and Real Estate Research, in partnership with researchers in Canada and France.

The co-authors are Prof. Jorien Louise Pruijssers at TBS Education in France, Prof. Zvi Singer at HEC Montreal in Canada, and Gallia Singer, an independent researcher in Canada. The researchers noted that obedience and conformity pressures are prevalent in financial markets and that investigating how these pressures operate among prospective financial market professionals – accountancy and finance students – could provide valuable insights in how to prevent fraud and other malpractice.

Safe Grading VS. Risky Grading

“Prior research has shown that obedience pressure can lead to dysfunctional and unethical actions on the part of professionals,” says Prof. Tsang. “This effect is demonstrated in recent accounting scandals involving Wells Fargo and Toshiba, in which senior managers required subordinates to engage in fraudulent financial reporting.

“People may be willing to obey authority, even contrary to their own preferences, in order to secure their jobs and further their careers. An authority figure can shape the framing of the risk inherent in a situation and can thus influence risk perception. People will then justify a shift in their own risky decisions based on the superior’s framing.”

An authority figure can shape the framing of the risk inherent in a situation and can thus influence risk perception. People will then justify a shift in their own risky decisions based on the superior’s framing.

Prof. Desmond Tsang

The researchers examined the impact of obedience and conformity pressure by conducting an experiment involving 131 undergraduate business students taking an Introduction to Financial Accounting course at a leading university in North America. The students were divided into three groups, who were each given three multiple-choice tests, which they were told would together form 15 percent of their final grade for the course – or five percent for each test. The tests each contained 20 questions.

In all three tests, students were invited to choose between a “safe” grading option, in which they were awarded five points for each correct answer, with a maximum score of 100 and a minimum score of 30, and a “risky” grading option, in which they gained six points for each correct answer, but had 1.5 points deducted for each one they got wrong or left blank. The risky option had a maximum score of 120 and a lowest score of 0. Students’ grading choices were used as an indicator of their risk preferences.

For all groups, the first test did not involve any social influence manipulation and served as a baseline against which to measure the results of subsequent tests. And across all tests, the first group of students served as a control group, who were not subject to such manipulations.

Obedience Pressure Leads to Safer Choices

In the second test, obedience pressure was built into the arrangements for the second group, while social conformity pressure was introduced into the set-up for the third group, before the students chose their grading options. An authority figure – one of the course instructors – read out a statement to students in the second group that read: “As you may know, financial markets have been hurt by people taking too much risk. I would expect students to be more conservative in their choices in choosing the grading option.”

During the experiment, students were invited to choose between a “safe” grading option and a “risky” grading option.

For the third group, a graduate student read out the students’ grading option choices from the first test, in which an average of 81.9 percent of students chose the risky option. In line with previous studies, the researchers theorised that conformity pressure could lead to more students choosing the risky option in the second test.

The results showed that the proportion of students in group two who took the risky grading option fell from 85.4 percent in the first test to 47.5 percent in the second test, demonstrating obedience pressure at a statistically significant level. Risk-taking among students in the second group was also notably lower than among the control group, 65.8 percent of whom took the risky option in the second test.

“We saw that students under obedience pressure made safer choices than students not under such pressure,” says Prof. Tsang. “The results indicate that obedience pressure from the authority figure had a significant influence on students’ choices, causing them to switch from the risky to the safe option at a higher rate than students in the control group.”

Conformity Pressure Works Under Certain Circumstances

However, the results for students in group three were contrary to the expected outcome, with a significant reduction in the number choosing the risky option, not an increase, showing that social conformity pressure did not affect their choices.

“This effect was opposite to the peer pressure information they received, possibly due to post-decision regret,” says Prof. Tsang. “We believe that our student participants might have been disappointed with the results of test one, as the overall average score of 65.4 percent was at the low end of the grading range, and subsequent conformity pressure may have displeased them even more.”

The third test was designed to check whether the results of test two were due to the statements presented or who delivered them. Students in group two were given the test under the social conformity arrangement but, in this case, the choices made by their peers in test one were read out by the instructor – an authority figure. Students in group three were given the test under the obedience set-up, but here the statement was read out by a graduate student – not an authority figure.

The study shows that social conformity pressure works when it is delivered by an authority figure.

When the peer choice information was read out by the instructor, the proportion of students choosing the risky option jumped from 47.5 percent to 62.5 percent, a statistically significant increase, showing that social conformity pressure worked, when it was delivered by an authority figure.

However, when the obedience pressure was delivered by the graduate student, the percentage of students choosing the risky option did not fall – instead it increased slightly from 57.5 percent to 65.1 percent. This indicated that obedience pressure was ineffective unless it was delivered by an authority figure.

Educator’s Role in Reducing Excessive Risk-taking Behaviour

“Our study reveals that aspiring financial market professionals are more responsive to obedience pressure than to conformity pressure,” says Prof. Tsang, adding that the results imply that obedience pressure might also alter the risk perceptions of practicing financial market professionals – and hence reduce actual risk-taking in financial markets.

“Managers in financial firms can use their power responsibly to discourage excessive risk-taking behaviour,” he says. “The practical implications of this finding are further strengthened by the realistic aspect or our research design.”


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The findings also have important implications for the education of accountancy and finance students, given the effectiveness of obedience pressure from an accountancy professor in reducing risk-taking behaviour among students, says Prof. Tsang.

“Attempts to inculcate risk perspectives should be conducted by educators throughout academic programmes and integrated into the curriculum,” he says. “We believe that simply teaching ethical codes is insufficient. Instead, educators should use case studies and simulations to improve students’ ability to recognise social issues rooted in the complex realities of professionals’ working environments.”