The Atlantic Monthly publishes a column, “Quick Study,” that briefly summarizes the findings of selected research articles. A recent entry caught my attention because it suggests a direct link between the collapse of the financial system and the massive bonuses given to bankers and executives on Wall Street. More important, the finding suggests that the financial crisis is not a problem that can be solved by merely tinkering with the technical aspects of the financial system. The human element—including issues of character, virtue, human nature, and definitions of meaning, vocation, the common good, and success—is as significant as programs and initiatives generated by the Treasury, the Federal Reserve, Congress or the White House. Human creativity, it seems, is hurt when demands for efficiency and productivity diminish our willingness to embrace our natural limits as finite creatures.

The bonuses bankers have handed themselves in recent years aren’t just excessive—they may have hastened Wall Street’s collapse. Although cash incentives tend to make people work harder, expending too much effort can actually hinder tasks that requires creativity, problem solving, and concentration. Anticipating large bonuses can lead to excessive self-consciousness and a focus so narrow that it warps perspective by blocking important outside information—like, say, common sense.

Source: “Large Stakes and Big Mistakes” in the Review of Economic Studies noted in The Atlantic (May 2009) p. 15 which you read here.