Banks’ strategic behaviours unleashing waves of job cuts

December 18th, 2008

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Since the credit crisis first erupted 15 months ago, the problem was mainly confined to the financial side of the economy. Today, we are seeing signs of the crisis spreading to the real economy in far-flung countries like Australia. As Australian banks expected to sack staff reported,

Jobs are disappearing at the four major retail banks, and staff freezes have been ordered at investment banks and struggling fund management groups.

There are news reports that 10,000 banking jobs could go in the months ahead. While we will not be investigating the credibility of this number in this article, we will explore the concept of Game Theory using banking jobs as an example.

In essence, Game Theory is…

… a branch of applied mathematics that is used in the social sciences (most notably economics), biology, engineering, political science, international relations, computer science (mainly for artificial intelligence), and philosophy. Game theory attempts to mathematically capture behavior in strategic situations, in which an individual’s success in making choices depends on the choices of others.

In the banking jobs example, what if one of Australia’s major banks decide to cut staffs? What will be effect of this strategic decision on the other banks?

To put it simply, if XYZ bank restructures its business and cut, say 15% of its workforce, it will have a competitive advantage against the other banks in terms of costs. During hard economic times, people are tightening their belts and consumer spending will be down. Naturally, consumers will care less about product differentiations and care more on finding the cheapest bargains. Therefore, businesses that can lower their costs will have a price competitive advantage against their rivals. So, in this case, what will the rivals of XYZ banks do? They will follow XYZ’s lead of restructuring and cutting staffs.

That’s why in the months ahead, as the economy slows further, we will see waves of corporate restructures and staff cuts. Unfortunately, these actions by businesses will further depress the economy, which in turn will provoke the next wave of cost cuttings.

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