Hindsight is always a wonderful thing, but for those of us looking at the banking community and wondering, "how could they have been so stupid?", a new book may help provide some of the answers.
Think Again – Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You, by Tuck School of Business professor Sydney Finkelstein and Jo Whitehead and Andrew Campbell, from Ashridge Business School in the UK, has examined the shortcuts people's brains can make when making decisions.
It then looks at how these can in turn derail sound decision-making and, as we've seen all too often over the past 18 months or so, lead individuals to think they're right when they are really wrong.
The book, the follow-up to Finkelstein's Why Smart Executives Fail, examines 83 flawed decisions and has concluded there are four basic "red flag" conditions that can lead to errors in judgement.
The first of these is "misleading experiences", or memories that seem similar to the situation one is facing, but in reality are not and contribute to more than half of all flawed decisions.
For example, the high profits made from sub-prime lending and the success of CDO vehicles seriously misled bankers across the world, causing them to take risks that now seem foolish.
Another good practical example of this is within mergers and acquisitions, argued Finkelstein. The model of paying a premium for shares was successful for a long time but, with the market now imploding, is proving to be a disaster.
The second red flag is "misleading pre-judgments", or situations where previous decisions or judgements influence current decision making.
These, suggests Finkelstein, are most likely to create distortions when leaders and managers are evaluating potential outcomes, as they can cause commitment to a flawed plan.
They can also cause people to fixate on a plan of action that has worked in that past but that is not necessarily suitable for the current situation.
A good, albeit controversial, case in point was the 1999 example of then UK Prime Minister Tony Blair in promoting an interventionist policy with regards to "failed states", a pre-judgment that in all likelihood later influenced his decision to support the war in Iraq, the authors argue.
The third red flag is "inappropriate self-interests", or personal interests that conflict with the responsibilities leaders have for other stakeholders.
Most people do not realise that self-interest operates at a subconscious level, the authors suggest, citing the example of former Merrill Lynch chief executive John Thain.
His proposal to the board of directors that he receive a $10 million bonus while the financial sector was in a dire state now, of course, has become notorious and a seemingly insensible action.
What it was, though, was an example of self-interest operating, probably, at a subconscious level, the authors argue.
The fourth red flag is "inappropriate attachments", or the strong emotional feelings people tend to have towards a particular group, tribe, place or possession, and which are inappropriate given the decision.
In the current financial climate, in which many organisations need to cut back on employment and sell assets, some "loyalties" will overrule rational redundancy decisions and some assets will be inappropriately retained due to personal alliances, they suggest.
A good example of this, argued Finkelstein, was the Bernie Madoff investment scandal. People were happy to give him all their money without ever questioning how he was investing it because they thought he was their friend, he pointed out.
At a more mundane level it's possible to take the example of a project sponsor trying to decide whether to kill off a faltering project.
Assuming the sponsor had been championing the project as recently as six months ago, immediately there is a problem when it comes to decision making because of the potential self-interest of the sponsor not to be seen to be getting egg on their face if the project is cancelled.
Similarly there are potentially "misleading memories" around the project because people had for so long thought it was a good idea and therefore be reluctant to let it go, even when all the evidence points to the contrary.
The difficulty with all this is that, while it is possible to identify these red flags,
coming up a formula to help people avoid them and so make better decisions is much more problematic, argued Finkelstein in a recent interview with the website reportonbusiness.com.
"In the majority of decisions, our brain's ability to recognise patterns and our emotions help us make reasonable decisions quickly. If our ancestors had to sit down and debate what to do when a sabre-toothed tiger was attacking, rather than making a fast exit, we wouldn't be around today," he pointed out.
"However, the fact that trust in our own judgment is so engrained can make us ignore red flags that warn that a decision was flawed from the start. That's how bad decisions get made," he added.
But it is possible to over-ride these red flags, pointed out Finkelstein, citing the example of President Obama admitting he had made a mistake in the nomination of Tom Daschle to a cabinet position.
"This was a clear case of inappropriate attachment. Daschle was a personal friend and Obama ignored evidence of potential conflicts and was slow to act when critics started questioning the appointment. To his credit, the president stepped up and fixed the situation within a couple of days," he said.
The key characteristics leaders need to have if they are to be effective and avoid bad decision-making are, first, open-mindedness. Good leaders tend to be more open to new ideas and be intensely curious, Finkelstein argued.
Second (and one of the hardest for many leaders), they need to be willing to own up to their mistakes and learn from them.
Third, they need to be able accept change and be good at anticipating the changes that are going on around them.
"The best leaders are the ones that make it their business to look at options and do something about correcting a mistaken decision, instead of ignoring the evidence and sticking to a flawed decision," said Finkelstein.
"It is important that leaders have sounding boards – people who do not have the same prejudgment and who will push back and challenge and not be afraid of pointing out contradictory facts," he added.
Bosses who are surrounded by "yes men" will often run into trouble, so it is in the interest of anyone who scales the heights to have advisers in place who are not afraid to push back and challenge your assumptions, he has suggested.
"Good leaders will get multiple sources of information and get honest feedback to make sure they are not missing or ignoring something that should be obvious," Finkelstein told reportonbusiness.com.
"They should encourage open feedback from all levels of the organisation. A lot of people at lower levels are hesitant about going up and saying 'I think you're wrong," he said.
"And for important decisions, don't just make a decision and forget it. Track how things are going and make adjustments. Successful leaders make more decisions, rather than fewer, and that is an important lesson.
"It's never easy to accept responsibility or admit a bad decision was your fault. But without owning up, there is never going to be any learning and leaders will continue to make bad decisions," he added.