Silicon Valley Psych Led to Bank Collapse.

As we approach the 100th anniversary of the Great Depression, recent events have shown that the fear of losing one’s life savings or the cash necessary to keep a business afloat has not changed. The collapse of Silicon Valley Bank (SVB) illustrated the innovative ways in which people can now participate in a bank run without physically showing up at the bank’s doors. Privately organized Slack channels were filled with panicked depositors trying to pull out their money. Behavioral economics can shed light on the flawed thinking that led to SVB’s failure. Venture capitalists (VCs) are skilled at managing portfolios with high upside potential, investing in the riskiest of long shots with a potential 10% chance of a huge payoff. However, VCs are not very good at worrying about the downside potential or negative skewness, which is the small chance of something terrible happening. Companies that deal with large amounts of money have risk managers to protect against downside risk, which is antithetical to the Silicon Valley culture. SVB’s culture created a false sense of trust within the tech industry, which led to affinity fraud- a preexisting group connection that allows scams to happen. In the tech industry, the shared background and trust within a tribe can lead to a sense of infallibility, which ultimately proved to be SVB’s downfall.#Psychology #Silicon #Valley #Contributed #Bank #Collapse