The Big Short - Organization Theory and Design course PDF

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“THE BIG SHORT” Organization Theory and Design group assignment presented by: A BRIEF INTRODUCTION This paper has the objective to prove how most of the topics we faced during our Organization Theory and Design course can be applied to everyday life through the analysis of the movie “The Big Short”, concerning the facts that lead to one of the worst economic disasters, the 2008 United States Financial Crisis, that consequently involved the whole World. ABOUT THE MOVIE Among the share markets, the mortgage one has always been considered as one of the most stable. Banks rely a lot on the stability that this market is supposed to have. In the movie we observe that corruption and frauds are at the base of it and are a threat for its steadiness. This main idea of presumptive stability doesn’t allow banks and investors to have a clear overview about what is actually going on. Three private investment funds discovered that the subprime market is fraudulent and unstable and it is about to face a dramatic crash, due to a constant growth of a financial bubble. Based on their discoveries, they decide to invest against this corrupted market, that looked stable to everyone else. By the end of the movie the subprime market has suffered huge value losses. This crash has repercussions not only among traders, but mainly on the society; in fact millions of people lost their houses, savings and jobs, while our three main characters were able to gain a big profit because of their short position.

ORGANIZATIONAL DESIGN MECHANIC STRUCTURE The sources of competitive advantages, come from hierarchy, formalization and centralization. These features have, as a consequence, predictable job procedures, high efficiency and efficacy, and in order to work at their best they need to operate in a stable and simple environment. We believe we can find such characteristics in Michael Burry’s company, Scion Capital LLC. Michael adopts a hierarchical approach toward his employees, the decision making power is centralized in his hands, meaning that he takes the final decisions and there’s no knowledge sharing among him and his team. The mechanic system is characterized by a high degree of formalization and narrowly defined jobs; but, in this particular case, we believe that formalization is missing since Michael’s team members appear to be confused about their duties. For example, one of the newcomers, from the moment he was hired, has never been talked to, and he doesn't know what he is supposed to do exactly. ORGANIC STRUCTURE The organic model is characterized by a low degree of centralization and formalization, low vertical and horizontal differentiation. This structure is suitable for companies that operate in a complex, uncertain and dynamic environment because of its flexibility. The market in which Mark Baum’s team acts, is an unsteady one which constantly changes, so having a flat structure makes it easier to have a high span of control that is needed in such environments. The decision making process is democratic, meaning that the whole team takes part to it, because there is a team based communication. In the movie we can link these

characteristics to the managerial approach that Mark adopts, indeed, him and his team cooperate with each other through sharing ideas, even though we observed that the final decision is still in Mark’s hand. In particular, within the movie this behavior is repeated in several occasions, for examples when Jared Vennet presents the new investment possibility, they gather together to discuss about which one would be the best strategy to adopt. They also decide to go all together to Las Vegas conference to support Mark while he was putting himself against all the major banks. We see a change in Mark’s behavior towards his team at one point in the movie, when he realizes that the whole economic system was about to crash, he stands up to his position reminding his team that he is the boss and he is the one that makes the final decisions. When he says “Come on, I say when we sell” he makes hierarchy prevail on the human relationship, and we notice that this takeover leaves the team members astonished. This is the only episode we can recall since, by the end of the movie, we see that his co-worker Viennie is able to convince him to change his mind about the sale of the swaps. ORGANIZATIONAL STRUCTURE From the movie we can’t actually identify to which kind of structure each “team” belongs to. However, we can suppose that Mark’s front desk team belongs to a divisional structure because they own an independent part of Morgan Stanley’s fund and they are able to exercise a high autonomy power. Charlie and Jamie, instead, don’t have any organizational structure, and so they can be considered entrepreneurial. We can see that they are completely independent in the decision making process, they can chose which direction they want to undertake in their investments and they are entirely responsible for their decisions. This last thing can also be a disadvantage since they have to carry all the weight on their shoulders. ORGANIZATIONAL CULTURE Organizational culture is the set of shared values, general principles and norms, that controls organizational members’ interactions with each other and with external people. It can also be a source of competitive advantage. Within a company, there is a whole invisible part of culture, that is composed of the general assumptions regarding what is acceptable and there is also a smaller part that you can observe in the physical world, usually composed of the active behaviors of people. A switch in someone's behavior can change the general assumptions that the company is sharing about what is appropriate and what is not. ROLE ORIENTATION The organizational culture can be expressed in terms of socialization, an intentional process by which members learn and internalize values and norms of the organization, in order to be included in their mindset so that they will command automatic behavior. Role orientation is a tool for socialization, and it is the way newcomers are taught values and norms, and it can be implemented in two different ways: in an institutionalized or in an individualized approach. In the movie we can identify an institutionalized role orientation, which is when the leaders tell in a vertical way what the organization is expecting from the employees, the roles that they need to cover, giving them no possibility to bring new values or to propose new behaviors and conduct to the company. We believe this is the kind of approach that is adopted by Michael for his company. Here, newcomers’ potential is not taken into consideration. In fact, we presume that it is almost impossible for them to somehow influence company’s values, since they are not even included in the investment decision making process.

HOFSTEDE’S MODEL It is the development of a cultural dimension theory, that describes the relation that exists between National culture and Organizations culture along six dimensions: Power Distance, Individualism, Uncertainty Avoidance, Masculinity, Long Term Orientation and Indulgence. We believe we can recall three of these dimensions in the movie: ●

Individualism - Collectivism: it is the degree of interdependence a society maintains among its members

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Uncertainty Avoidance: it indicates to which extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations

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Long term - Short term: if long term oriented societies attach more importance to the future, fostering pragmatic values oriented towards persistence, saving and capacity for adaptation, in short term oriented societies, values promoted are related to the past and the present, including steadiness and respect for tradition.

We decided to compare the informations we found in the Hofstede’s website about the United States culture with the facts described in the movie. As for the first dimension, with a score of 91/100, the United States presents itself as one of the most individualist cultures in the world. This means that the realization of the single individual prevails on the collective one. This is also proved in the movie from the moment when our main characters put their interests above the one that the society has. Michael wants to prove that his discoveries about the financial bubble were right. Charlie and Jamie are eager, they want to sit at “ the big’s table” and make more money as possible. Also, Jared is interested in making as much money as possible. Ben and Mark’s team are the only ones that until a certain point, are concerned about what will happened to all those people that had risky mortgages and that would probably lose their houses and their jobs. Although, at the end, Ben decides to help Jamie and Charlie to get all the profit while Mark’s team decides to keep it for them. The United States’s Uncertainty Avoidance score of 46/100 is considered to be rather low but i actually a common belief that the Americans are considered to be innovative and open to new and different experience on several fields in life such as technology, business, and even food. This aspect may arouse some interest since the score the United States have in the Long Term Orientation dimension is very low too, 26/100. This highlights the tendency to analyze new informations, to look for proofs and to check whether these are true or not, just like Mark and his team did after receiving the new and unexpected investment possibility they made research on; they take action by checking in the outskirts and interviewing people. The same is for Charlie and Jamie, they analyze numbers over and over again before making a decision, this aspect also highlights the fact that Americans believe in their traditions and in what is considered to be certain, just like the mortgage market.

PERSONALITY THE BIG FIVE MODEL It is a model that divides personality into 5 broad dimensions of behaviors, and the theory behind this model is that innate traits of a person really influence and shape his/her behavior. Companies often use it in order to have a better understanding of people’s stable patterns of emotion, cognition and behavior.

All the characters in the movie have a very strong personality; we can analyze Michael Burry’s and Mark Baum’s personality using this model. The personality dimensions are: Openness to experience: it is the tendency of a person to acquire and accept new knowledge and information and face new challenges. Both Michael and Mark are open minded people that seek new experiences. Michael, in particular, can be considered highly open minded because he managed to discover something that no-one knew, with a lot of confidence. Even Mark is ready to accept new challenges and different point of views, taking into consideration the investment opportunity Jared proposed him. He is willing to acquire new knowledge and efficiently use it. ●

● Conscientiousness: it describes how much a person is reliable and trustworthy. Michael is very low on consciousness. We can say that because first, we see that he does not conform into social norms, otherwise he wouldn’t have thought of “out of the box” m  anaging to achieve the results he had after his researches about the mortgage financial bubble. Secondly, even if he is very meticulous with his calculus, he decides to put all the money of the investors at risk, being sure of his success even if the others were not. An example is when one of his employees suggests that maybe he could be wrong, Michael replied “It is possible I’m wrong, I just don’t know how!”. Mark, however, can be considered as a conscientious and precise person. Indeed, we can see how, before accepting Jared’s proposal, he and his team decide to go to Las Vegas to check out the real situation, where they discover that many people weren’t paying mortgages. ● Extroversion: it indicates the quantity of the relationships that a person wants to keep alive. Michael can be considered as highly introverted; he prefers to reason by himself without any help or exchange of information. It seems that his introversion derives from the fact that he doesn’t trust people nor the system, as he said while talking to his employee, “I think that we work in a completely fraudulent system.” Mark, instead, appears to be highly extroverted. He is surrounded by his collaborators, with which he shares information and decisions. ● Agreeableness: it indicates the quality of these relationships. Michael can be considered very low in agreeableness, we understand that from the fact that he is not sociable and doesn’t want to interact or cooperate with his employees. Even when he has the chance, he is not able to explain himself in a clear way, so he feels misunderstood. He also has a different dress code; we see him in the office wearing a t-shirt, shorts and flipflops, and a unique way of behaving, characteristics that make him so different from the others. At the beginning of the movie we can hear Michael saying “Most social interactions are awkward for me and for the person, even when I try to compliment someone, it comes out wrong”, and this occurs when he tries to compliment his new comer about his haircut, asking him if he cut his hair by himself. Mark, on the contrary, is very cooperative with his team, he discusses with them, sharing his ideas and taking into consideration other’s opinion when he has to make decisions or when he analyzes the situation. However, he is very selective and demanding regarding the people he can trust, because, as it is said in the movie, “Mark has built his career on never assuming anyone or any company was legit without proving it”.

Neuroticism: it is about emotional stability; about the fact the person has frequent swings in his/her mood, or on the contrary that he/she is very emotionally consistent. We can consider Michael as highly neurotic, even though he appears to be very self-confident and sure about the choices he makes. We notice that he has strong and uncontrolled reactions when provoked; he overreacts and becomes very nervous in such situations. We can see this when he turns all the volume up in his office or when he plays the drums because he has been deeply touched. Mark as well has a neurotic personality, he appears to be very negative and nervous, and he has strong and uncontrolled reactions at the slightest defiance, especially at the beginning of the movie where we see that he refuses to go to the intervention group. ●

THE MYERS-BRIGGS TYPE INDICATOR This model is used at the beginning of the individual’s career to put him/her on the right team in order to build up teams in the most effective way. The personality components are not shaped around absolute values, but they are shaped around dichotomies. Key personality components are: Introversion vs Extroversion: it concerns social interactions and how individuals recharge themselves, getting new energy. Michael is highly introverted; he needs his own time and space to work, without any interaction with colleagues. In the movie, there are different scenes such as when he is in the basement playing drums or when he is alone in the office thinking about the strategy, that must be undertaken; at the beginning of the movie we can also hear him saying “I’ve always been more comfortable alone, I believe maybe it is because of my glass eye”. On the other hand, Mark is an extroverted person because he enjoys working in a team, he is comfortable with “sharing” the decision-making process with his team and gather information from external people. In the movie, after the meeting with Jared, Mark decides to discuss with the team the next step. ●

● Sensing vs Intuiting: concerns the means by which information is collected. According to the movie, we are able to label Michael as a sensing person because his reasoning and research are based on numbers, analyzing data in a detailed and structured way. Mark can be labelled as an intuiting person because he is not focused on details but he prefers to have an overall view of the real estate market. When Mark goes to talk to an employee of Standard and Poor’s, his purpose is to understand why this credit rating company is lying about the evaluation of the real economic situation. Thinking vs Feeling: is about the evaluation of information and how to use it in order to solve problems. Michael has a thinking attitude since he uses an analytical approach to solve problems and make decisions. That's why we believe he adopts a rational model in making decisions, characterized by a perfect rationality. This model requires certainty and it is ideal when the problematic issues that a company is facing is known. All the possible alternatives and the effects that each of them could have, have to be known as well . We know that this model doesn't suit when dealing with problems involving people, furthermore we believe it suits Michael’s way of making his decision about the acquisition of the swaps. ●

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Judging vs Perceiving: related on the decision making progress, how you prefer to make decisions.

We can identify both Michael and Mark as judging people, they like to plan their decisions and they both feel more comfortable when they are prepared for what’s going on. PERSONALITY IMPLICATIONS We believe that the traits of these characters are worth observing because of their organizational implication, meaning that their inner characteristics influence the behavior and choices they make at the workplace. Mark’s background and personal anger made him stand against the corrupt system that disappoints and disgusts him so much, wishing for it to collapse, indeed we can hear him saying “Then this guy walks into my office and says those same banks got greedy, they lost track of the market, and I can profit off of their stupidity? ..Yeah, I want him to be right!”. Nevertheless, he still cares about how the consequences of the crisis within the system will affect people and the ethical implications as well. From these quotations, we can understand a lot of his personal values and caring attitude: “And I'm getting madder and madder and I ask this guy how he sleeps at night knowing he's ripping off working people.” Jared’s actions are driven by his desire to make profit. He is greedy and would try anything to pursue his objective without caring about the consequences of his actions and the effects that the crisis will have upon people; he is doing everything for his own self-interest. When he talks about the default swaps he says to Mark’s team: ‘’Let me put it this way: I'm standing in front of a burning house, and I'm offering you fire insurance on it.’’ Ben Rickert is the most disappointed person we encounter in the movie. He believes that the whole system is going to fail, because of the people’s greed and the decay in terms of moral values and honesty, and that the “whole world is going down’’. In fact, this is the reason why he decides to quit “the game in disgust’’. After having helped Charlie and Jamie in Las Vegas, he says“If we're right, people lose homes.... jobs. People lose retirement savings, people lose pensions. You know what I hate about fucking banking? It reduces people to numbers. Here's a number - every 1% unemployment goes up, 40,000 people die, did you know that?”. In conclusion, we can notice how different people, with a different approach to their job, can reach similar results. This shows us that there isn’t just a way of facing a problem, but it can be solved with different procedures based on different cultures and personalities.

CONCLUSION As mentioned in our introduction we can see how the knowledge we acquired from the course enabled us to have a critical point of view on what happens in the world, and to have a better understanding of the dynamics that lay behind any organization, analyzing the aspects related to the structure of an organization and the aspects deal with the human component....