Banks are run by executives, and executives protect themselves, and that does not always mean that banks are going to behave rationally.
Interpretation
Executives prioritize their own interests, which can lead to irrational banking behaviors.
In this quote, Daniel Kahneman highlights the ingrained self-protective tendencies of bank executives that can influence decision-making within financial institutions. This may result in irrational behaviors that do not always serve the best interests of the bank's stakeholders or the broader economy.
In practice
In a discussion about corporate ethics, this quote can be used to illustrate how executives may make self-serving decisions.
We think, each of us, that we're much more rational than we are. And we think that we make our decisions because we have good reasons to make them. Even when it's the other way around. We believe in the reasons, because we've already made the decision.
The average investor's return is significantly lower than market indices due primarily to market timing.
Laziness is built deep into our nature.
Through some combination of culture and biology, our minds are intuitively receptive to religion.
You are more likely to learn something by finding surprises in your own behavior than by hearing surprising facts about people in general.
It's very easy for trusted companies to mislead naive customers, and life insurance companies are trusted.
After costs, only the top 3% of managers produce a return that indicates they have sufficient skill to just cover their costs, which means that going forward, and despite extraordinary past returns, even the top performers are expected to be only as good as a low-cost passive index fund. The other 97% can be expected to do worse.
If the fluctuations in your investment portfolio are reduced, the impact of emotions and behavior on your account is also reduced.
The securitisation of mortgages added a new dimension of systemic risk. Financial engineers claimed they were reducing risks through geographic diversification: in fact they were increasing them by creating an agency problem. The agents were more interested in maximising fee income than in protecting the interests of bondholders. That is the verity that was ignored by regulators and market participants alike.
Debt is so ingrained into our culture that most Americans can't even envision a car without a payment ... a house without a mortgage ... a student without a loan ... and credit without a card. We've been sold debt with such repetition and with such fervor that most folks can't conceive of what it would be like to have NO payments.
Liquidity is a good proxy for relative net worth. You can't lie about cash, stocks, and bond values.
A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.
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