For 2017, it pays to make sure you have the right goals communicated to your bank or department. One of the classic case studies in goals-gone-wrong come from the backwaters of the 2012 Olympics in London. It was the qualifying round of women’s doubles badminton and the World Champion Chinese team faced off against the top-ranked South Korean team. In front of 16,000 fans, a match played out that was one for the record books. The only problem was that it was not what anyone expected. The outcome of this match serves as both a case study in game theory, and an allegory of how setting the wrong goals can result in some unexpected consequences.
With both teams already qualifying for the quarterfinals, the winner of the match would go on to face the number two Chinese team while the loser would face Denmark. The problem was that Denmark was the vastly weaker opponent. As such, since the goal was to win the Gold, China proceeded to throw the match by serving into the net and hitting the shuttlecock out of bounds. The real problem came when the South Korean team had the same strategy. What ensued was probably the worst game ever played as not only was the play atrocious, but both teams feigned like they were upset at losing each point. The crowd, now doubly insulted, booed loudly and 20 minutes into the charade, the Referee brought all four players together and threatened a Black Card citing an Olympic rule that requires that all players do their best. The team that got the Black Card would be disqualified. Now, the rules of the game changed.
Really Great Bad Play
Unfortunately, both teams kept the same goals, but now under the threat of disqualification, they made it look like they were trying harder. When China hit out of bounds, South Korea would run to make a diving save to prevent China from losing the point. They would then pull off an amazing hit placing the shuttlecock back in the center of the court so China would be forced to play it or risk being disqualified. The game turned into a negative of itself as now both teams were trying to figure out how to lose in the most creative way possible.
South Korea ended up winning the game, but after, both teams got the dreaded Black Card and were disqualified from play.
The moral of the story is to be careful how you set your goals. Goals of asset size may come at the expense of profitability. Goals of net interest margin may hurt earnings. Goals of profitability may come at the expense of risk and goals of revenue or fees may come at the expense of customers, as Wells Fargo found out. Not only be clear on what your goals are but how and when you measure them. Finally, ask - how could the system be gamed? While you may never figure out all the unintended consequences of your goals, some are highly predictable. It pays to at least know what to look for and if you see signs that your staff are deviating from the goal’s intent, be sure to quickly adjust and put new rules in place to elicit the behavior you want. While your bank may not experience problems as blatant of what took place in the London Olympics, there are likely hundreds of instances where your bank’s earnings or goals are being sabotaged knowingly or unknowingly. While it is rare for a bank to be in 100% of goal alignment, in 2017, it might pay to at least improve your goal setting and monitoring process in order to be more effective at building long-term franchise value.
Submitted by Chris Nichols on January 05, 2017