Banking sector – huge incentives, narrow focus?

Cognitive psychologist Karl Duncker devised the so-called candle problem in the 1930s. You are given a candle, a book of matches and a box of drawing pins, and have to fix the candle to the wall so that it will burn without dripping wax. Most people work out fairly swiftly that the way to do it is to take the drawing pins out of the box, pin it to the wall and stand the candle in it.

Two groups were given the problem. The first group were told the experimenters just wanted to time them to establish norms for the task. The second were given an incentive – the fastest 25% got $5 and the fastest person that day got $20. (These were substantial sums back then.) Guess what? The incentivised group took, on average, nearly three and a half minutes longer to find the solution.
Why? Solving the problem involves a tricky cognitive manoeuvre, that of overcoming ‘functional fixedness’. You have to stop seeing the box as a container of drawing pins, and start seeing it as a candle stand. The effect of the incentive was to make people concentrate harder, narrowing their focus and making it harder to see around the edges of the problem.
You might argue that recent events in the banking sector – huge incentives, narrow focus – validate the findings but at considerably greater cost. So, if you think that intelligence, creativity, ingenuity and lateral thinking might have more to do with success than raw motivation, don’t offer financial incentives.
– Alastair Dryburgh is chief contrarian at Akenhurst Consultants.

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Fewer Companies Going Bust

Fewer companies going bust is usually considered good news – but not for Aim-listed Begbies Traynor. The insolvency specialist on Monday issued a profits warning after more companies than it hoped for managed to keep trading – rather than go to the wall. It was not quite what Ric Traynor, executive chairman, foresaw in July, when he was quoted as saying: “The undertaker is polishing off the hearse again. Someone’s got to bury the bodies.” On Monday he admitted: “There’s been a milder economic winter than everyone predicted and therefore less corporate deaths.”
By Alistair Osborne

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HMRC is starting to lose patience

By James Hurley 7:24PM GMT 01 Nov 2010
HMRC’s remissions and write-offs have risen by 40pc over the last year, from £4.6bn to £6.4bn. Steven Law, president of R3, the insolvency trade body, said there had been “a tightening of the screw” on companies that owe money to the Treasury.
“Our members are seeing a tougher line being adopted, especially with companies that have had two or three chances to repay [outstanding taxes] and haven’t been able to comply with the terms. HMRC is starting to lose patience.”
Roy Maugham, partner at accountancy firm UHY Hacker Young said: “The Treasury is very hungry for cash at the moment. Our concern is this is going to lead to much more aggressive debt collection tactics.”

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