First published March 23, 2020, Regulatory Intelligence
Increased pressure to perform under stressful conditions and psychological distance that many employees are facing during the COVID-19 crisis make it imperative for managers to assess new risks likely to emerge when staff operate remotely, according to behavioral science experts.
Such pressures and risks common to many companies may be magnified in financial services, given the volatility in markets and disruption to routine tasks, such as bringing new clients on board, says Wieke Scholten, senior behavioral specialist at the Dutch management consultancy &samhoud.
“We observe financial services firms, for instance, facing the challenge of onboarding many new clients,” Scholten told Regulatory Intelligence. These particularly include intermediary companies trying to help smaller businesses receive government support and loans. "With these type of intermediary parties it is of utmost importance to detect fraudulent practices."
In a report published by &samhoud this week, the increased pressure to perform and greater social distance employees feel are cited as two drivers that could lead to behavior and decisions that put firms at greater risk.
“The current (market) conditions likely lead to employees experiencing an increased pressure to perform,” said the study. One effect is they may be more likely to act on impulse than they would under normal working conditions. “Due to this innate human bias, people are more likely to take actions they would not take normally, in order to feel ‘they at least did something about it,’” the report said.
Another behavioral risk is so-called “hot-state decision-making.” That is when employees, under the influence of their emotions, make decisions ‘in the moment’ that they would not make with more careful consideration.
When individuals are under stress, they are less capable of thinking and acting rationally and weighing the consequences of their decisions. This behavioral science insight was pioneered by psychologists Daniel Kahneman and Amos Tversky.
“People take more risk than they would in a 'less hectic’ situation,' the &samhoud study said. “In addition, a crisis increases people’s natural tendency to choose short-term gains over long term ones; a cognitive bias that behavioural scientists refer to as the present bias.”
Lastly, under such conditions, ethics plays a lesser role in decision making, a phenomenon called “ethical fading.” When employees are under pressure to deliver, they focus less on whether their decisions are ethical and more on the choices immediately in front of them, such as making a profit or solving a problem.
Given the sharp declines forecast for economies and resulting impact on employment, workers may feel under enormous pressure to stand out among their colleagues in the hope of keeping their jobs.
Some of the largest U.S. financial firms have publicly tried to reassure staff that there will be no layoffs due the crisis. Morgan Stanley, Goldman Sachs, Wells Fargo, Deutsche Bank, HSBC and Citigroup were among those last week reassuring staff privately or through public statements that job cuts are not on the table.
Banks are hesitant to make changes because the future is so uncertain, executives and external consultants told Reuters. But some say the uncertainty over the economic fallout from COVID-19 makes such claims suspect.
“You would be fibbing if you said we can really make guarantees or assurances to you,” said compensation consultant Alan Johnson. “There’s a danger of making promises that you ultimately can’t keep. Nobody knows.”
Increased psychological distance
A second driver behind potential risky behavior is the sense of psychological distance employees feel from working remotely. This distance could prompt an “out of sight, out of mind” experience among workers, which leads "to demotivation and increased conduct risk: work all of a sudden seems further away and rules and regulations we need to follow seem less important,” the study said.
Working from home might also shift an employee’s identity in the sense that one’s role as a ‘family member’ becomes more salient, taking over from their identity as an employee as the primary social identity during working hours. “This directly drives behavioral risk: it might lead to people weighing interests differently and taking riskier decisions.”
And since social groups tend to be our “moral anchors,” psychological distance negatively impacts the ability for employees to speak their minds, hindering them to speak up about their doubts and concerns.
What can companies do to mitigate such risks?
For managers finding such new and uncertain terrain difficult to navigate, Scholten and her colleagues at &samhoud make several recommendations, including assessing the processes and procedures that employees follow when working from home, and to examine "not what is designed but at how these affect people’s behavior in practice.” For example, what risks might people be inclined to take? How do you control these risks? What additional checks and balances can you build in?
To address psychological distancing and safety issues, management might wish to encourage people to keep speaking up and try to foster a climate of psychological safety. “Create space for employees to express their concerns and discuss the dilemmas they experience. It might help to appoint a ‘digital devil’s advocate’: someone that has the explicit task to challenge when tough decisions need to be made.”
In addition, managers should do personal check-ins, keep people pro-actively informed of developments and schedule informal contact moments. They should also stress the social identity of the team more proactively – “we are in this together.” This would likely “stimulate the feeling of belonging to a group and ensures that people are less likely to be in it for themselves.”