The Human Factors of a Financial Crisis

On Tuesday, Frontline’s documentary “Inside the Meltdown” was aired on PBS.  The program focused on the antecedents of the current financial crisis, including subprime mortgage investments and credit default swaps.  The timeline concentrated on the cascading events of 2008 including Bear Stearns collapse, the bankruptcy of Lehman Brothers and the subsequent crises at AIG, Fannie Mae, and Freddie Mac.

From a human factors standpoint, the documentary provides insight into how people’s perceptions, decisions, and actions contributed to the crisis, including:

• How rumors lead to decreased confidence of traders, investors, and the general public;
• How ubiquitous information sources influenced perceptions;
• How decisions made by government officials (e.g., Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Congress, etc.) both helped and hindered;
• How extreme stress effects decision making quality; and
• How peoples understanding of risk influences behavior.

One of the more interesting statements, at least from a human factors perspective, came from Michael Petrucelli – a former senior vice-president of Lehman Brothers:

“I think in hindsight it’s easy to see there was a bubble, but, you know, when you’re at a party having a good time, sometimes it’s hard to stop and leave the party.”

Overall, this documentary is a great starting point for individuals trying to better understand the current financial crisis.

I plan on further discussing this topic in future postings, including how the discipline of human factors and ergonomics can assist with learning from our collective mistakes and how appropriate safeguards can be implemented  to prevent or mitigate future occurrences.