Distill Analytics
A New Alternative Data Edge


From the Still

What Earnings Calls Foreshadowed About the 2008 Financial Crisis

A Banking Sector Case Study

In hindsight, everybody knows how and why the 2008 financial crisis unfolded. From The Big Short to the innumerable reports that have been published, we can see the signs leading up to the financial crisis. Among the critiques of the limitations of economic models are the lack of better understanding and inclusion of human factors in finance trading. The addition of psychological science can speak to this category of limitations, not just at the level of the market, but at the level of company management.

In the last 40 years, tools that analyze text have been developed by academics and applied in military intelligence settings. Some of these tools can be applied to systematically quantify what drives leaders and understand their thought processes. These quantified values have been shown to increase the accuracy of forecasts of future outcomes. To determine if useful insights could be generated from these techniques when applied in a financial setting, Distill Analytics conducted an analysis of three major Wall Street banks: Lehman Brothers Holding, Goldman Sachs, and Bank of America. Our analysis covered the period of time from 2002 to 2016. To limit the bias in the analysis, the banks were anonymized and dates were hidden from the analysts.

Our findings include:

  • In the early 2000’s, each of the banks displayed unique psychometric patterns. Lehman Brothers’ low volatility suggested a stable and controlled executive team, but one that may have prioritized streamlined approaches the goals that they set. Goldman Sachs presented much higher volatility in its scores. Our metrics showed a dynamic team that engaged in complex reasoning, considering a wide range of dimensions and perspectives. Lastly, Bank of America presented a moderately consistent pattern and had indications of a forward thinking team.
  • Our data reveals that despite their previous differences, all three banks displayed a similar, unexpected pattern beginning in 2006. During their biggest stock price boom in late 2006, early 2007 we saw uncharacteristic declines in two key metrics, Excellence and Cognition, that normally increase when companies are experiencing success.
  • What’s more interesting are the differences between Lehman Brothers, which ultimately collapsed, and the two surviving banks, Bank of America and Goldman Sachs.
    • In the two quarters before their collapse, Lehman recorded an abnormal spike in two metrics that had previously been entirely absent in the preceding six years of analysis, Vulnerability in March 2008 and Impact in June 2008. The sudden introduction of these metrics indicated a dramatic inflection point in the way leadership was communicating.
    • Unlike Bank of America or Goldman Sachs, in the face of a rapidly declining stock price, the Cognition score of Lehman Brothers did not rally and remained below its six year average. An increased Cognition score indicates an executive team looking for alternatives and searching for solutions, while a sustained low Cognition score reveals a team under stress.

By applying new psychometric technology to the text of quarterly earnings calls, Distill Analytics can provide an additional perspective into the teams leading these key players in the financial crisis.

Contact us to find out more details about this analysis, our metrics, and what Distill Analytics can do for you.



the Metrics:

Excellence: Measures the internal motivations for success or the desire for improvements

Impact: Measures internal motivations for impact and influence

Vulnerability: Measures interpersonal warmth

Cognition: Measures mental processes, decision making state and stress level

Ryan Cross