Staff reported that incentives were geared toward conforming with prevailing IMF views. Several senior staff members felt that expressing strong contrarian views could “ruin one’s career.” Thus, views tended to “gravitate toward the middle” and “our advice becomes procyclical.” Staff saw that conforming assessments were not penalized, even if proven faulty.Michael Lewis' article for Vanity Fair paints a similar picture of how dissenting voices in Ireland were treated prior to the collapse. The IMF's findings confirm that economic myopia is not confined to Ireland however.
...Self-censorship appeared to be a significant factor even in the absence of overt political pressure. Many staff members believed that there were limits as to how critical they could be regarding the policies of the largest shareholders—that “you cannot speak truth to authorities” since “…you’re owned by these governments.
So what is to be done? Ultimately we must face the reality of human behaviour. We are motivated by social norms to behave like everybody else. It's Lesson 4 in Sapra and Zak's guide to the eight lessons of neuro-economics for money managers (ht Simoleon Sense):
What was beneficial for our ancestors on the African savannah does not always serve us well in financial markets. Social learning is great when mastering calculus or riding a bicycle, but herd behavior in markets is typically detrimental. Herd behavior violates the “all else being equal” rule in economics in that investor decisions are not independent, and mispricing is thus likely to occur. Trading does not occur in a vacuum; often traders buy an asset because they see it going up in value. As more investors jump on the bandwagon, herd mentality results in a price bubble.
Our brains have evolved to make us desperately want to follow the crowd. Riots, overly popular restaurants, and asset market bubbles are the results. Herd behavior can occur even when individuals do not coordinate with each other but trade only on the basis of private information and prices.
...But evaluating alternatives while others follow trends goes against our nature because our brains bias us to follow the crowd. Desperate buying and panic selling are the inevitable consequences of herd mentality. Instead, investment professionals should discount their evolved bias toward following others and be contrarian. This approach will make them feel alone and exposed—two things our ancestors feared the most.No wonder those shouting 'stop' have such a hard time when the everyone else is shouting 'go'. One of the great challenges we face in Ireland is that of creating a culture that is less conducive to herd thinking. Regulatory and organisational reform will not be enough. We only have to look at the IMF to see that.