How the Psychology of Silicon Valley Contributed to a Bank Collapse

Silicon Valley Bank’s recent collapse has been likened to a “Twitter-fueled bank run,” with depositors resorting to online methods to withdraw their savings. The bank’s demise highlights the need for risk management among tech start-up heads and venture capitalists. While those in the industry may be experts at creating positive skewness – upside potential – through portfolio management and spotting winning “unicorns”, their ability to manage downside risk is limited. Risk managers in the banking sector are geared to protect against scenarios where cash is lost, while Silicon Valley culture is more attuned to taking risks. Diversification is another key factor, but group psychology and a sense of affinity within a particular tech tribe can and has led to a self-assured belief that all is well, despite a potential flaw in the bank’s financial health. Contagion, the mathematical model of how mass withdrawals take place, is only one recipe for the unpredictable force that unfolds when a bank fails, and the impact it has on its depositors.



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