August 26, 2009

The Peter Principle needs an addendum

Sir John Kay writes “Banks brought down by a new Peter Principle” August 26, and scores good argumentative points. That said the banks and the financial sector have also been severely affected by the Peter Principle that operated in the financial regulatory world.

In this case the Peter Principle could have been activated when allowing PhDs to move from financial modelling directly into the financial application of models, without having to dirty their hands with for example some old fashioned inventory finance. But, if so, this also calls for an addendum to the Peter Principle since that would indicate that it is not only about individuals moving up until they find their level of incompetence, but also about competent individuals moving into areas where their competence is outright dangerous.

Who but a deskbound PhD could have come up with such a crazy notion that you could outsource so much regulatory powers to the credit rating agencies without these being subjected to capture… ipso facto.

A prudent regulatory reform might be to see to that the PhDs are always in minority wherever decisions affecting life on main-street are taken.