The increasing frequency of misconduct in financial institutions, evidenced by a 32% year-over-year increase in fines in 2023 in China, necessitates a deeper understanding of the underlying behavioral risks. Misconduct risk, a newly recognized financial risk, encompasses various core business activities and is characterized by complexity and concealment. While previous research has focused on influencing factors (objective and subjective), complexity theory's application to the financial system, and psychological contracts, a gap remains in understanding why organizational decision-makers make inappropriate decisions and the roles of human and organizational errors. This study bridges this gap by constructing a model analyzing the generation mechanism, occurrence conditions, decision-maker motivation, and behavior adjustment of misconduct risk in financial institutions, using organizational and human error theories and behavioral decision theory as a foundation. The study builds upon prior work on organizational and human errors (Lin et al., 2023), and decision-maker behavior risk and employee fraud (Cusin and Flacandji, 2022; Fata and Martens, 2017).

The literature review examines theoretical research on organizational and human error. Reason (1995) introduced 'Organizational Errors' as latent errors within systems. Goodman and Ramanujam et al. (2011) highlight deviations from procedures as misconduct. Van Dyck and Frese et al. (2005) identify systematic organizational biases, while Reason (1995) emphasizes management and decision-making errors as the most threatening. Other scholars focus on knowledge-based human error stemming from system defects, insufficient training, and poor organizational culture (Glavas, 2016), or on the scarcity of resources (Grabowski and Roberts, 1996). In cognitive psychology, human error is viewed as a manifestation of internal cognitive processes (Qi and Chiaro et al., 2023). Grabowski and Roberts (1996) link accidents to system defects leading to human errors, while Read and Shorrock et al. (2021) study human error from the perspective of work environment and personal skills. Behavioral decision theory, encompassing rational and behavioral decision-making theories, is also reviewed, highlighting bounded rationality (Dhami and Al-Nowaihi et al., 2019), heuristic biases (Tversky and Kahneman, 1991), and the influence of information costs and individual characteristics on decision satisfaction (Raven and McCullough et al., 1994). The review notes the lack of research on misconduct risk generation mechanisms in financial institutions integrating organizational and human error theories.

The study uses a mixed-methods approach. It begins with a literature review exploring relevant theories of organizational and human error and behavioral decision-making. A research framework is established that uses these theories to investigate the generation mechanism of misconduct risk. A risk analysis model for organizational decision-makers in financial institutions is constructed. This model analyzes the root causes of inappropriate behavior from the perspective of organizational decision-makers, focusing on three key conditions: conflicts between organizational and decision-maker interests (human error); failures of organizational contextual constraints (organizational errors); and lack of decision auditing and feedback mechanisms (organizational errors). The model incorporates the development of a decision-maker's utility function, considering factors such as performance incentives, increased decision-making power, and promotion opportunities. The model allows for an analysis of how decision-makers adjust their behavior in different situations to maximize their utility. A case study of the China Everbright Group (CEG) is used to illustrate the model and its application. The case study examines how the three key conditions manifested in the CEG situation and draws conclusions on the reasons for the misconduct.

The study's risk analysis model identifies three main states based on the relationship between decision-makers' self-assessment of competence and their benefit-utility expectations: (1) a balanced state where self-assessment equals expected utility, leading to minimal inappropriate behavior; (2) an imbalanced state where self-assessment exceeds expected utility, potentially leading to various types of misconduct depending on the specific imbalance in the utility of performance incentives, decision-making power, and promotion; (3) an imbalanced state where expected utility exceeds self-assessment, possibly leading to either efforts to improve competence or settling for the status quo. The analysis reveals that the occurrence of misconduct risk among organizational decision-makers in financial institutions primarily stems from three conditions: conflicts of interest between organizational and individual interests (human error); ineffective organizational situational constraints (organizational errors); and a lack of effective decision auditing and feedback mechanisms (organizational errors). The case study of the China Everbright Group (CEG) exemplifies these conditions, highlighting how internal governance failures, lack of transparency, and power imbalances contribute to misconduct. The study proposes several mitigation measures: optimizing performance incentives, improving corporate governance and organizational culture to align interests, strengthening organizational constraints and decision auditing mechanisms to raise the cost of inappropriate behavior, and dynamically balancing the internal structure of performance incentives, decision-making power, and promotion opportunities.

The findings address the research question by providing a comprehensive model explaining the generation mechanism of misconduct risk in financial institutions. The model integrates organizational and human error theories with behavioral decision-making theory, offering a nuanced perspective beyond traditional approaches. The significance of the results lies in the identification of three critical conditions contributing to misconduct risk, providing actionable insights for mitigating these risks. The model's application to the CEG case study demonstrates its practical relevance. The study's contribution to the field is the development of a novel framework for understanding and addressing misconduct risk, highlighting the interplay between organizational factors, individual decision-making processes, and incentive structures.

This study provides a comprehensive framework for understanding the generation mechanism of behavioral risk in financial institutions, integrating organizational and human error theories with behavioral decision-making concepts. The three key conditions identified – conflict of interest, ineffective constraints, and lack of auditing – offer valuable insights for risk mitigation. Future research should expand the model to incorporate external factors and explore the dynamic interplay between institutions and decision-makers using game theory, to further refine the understanding of misconduct risk.

The study focuses primarily on organizational decision-makers in financial institutions, limiting its generalizability to other contexts. The model relies on several assumptions regarding the utility function and decision-maker behavior, which might not perfectly capture the complexity of real-world situations. The case study analysis, while illustrative, cannot fully represent the diversity of factors contributing to misconduct in all financial institutions.