"History is a wonderful thing, if only it was true"

Sunday, July 26, 2009


Executive Summary - BusinessWeek:
"How Overconfidence Helped Sink the Street

"Was Bear Stearns' Jimmy Cayne the modern incarnation of Icarus? Like the Greek mythological character, Cayne and other erstwhile masters of the universe—Lehman Brothers' Richard Fuld and AIG's Joseph Cassano spring to mind—seem to share a personality trait: hubris. Delving into the roots of the financial crisis in an essay for the July 27 issue of The New Yorker, Malcolm Gladwell arrives at a psychological explanation for what went wrong.

Overconfidence, he points out, afflicts people in many walks of life—as an example, Gladwell cites Frederick Stopford, the British officer who led the disastrous invasion of Gallipoli in 1915. But it's particularly prevalent in the field of finance. Wall Street, after all, is largely built on trust, and swagger can be a key ingredient in winning other players' trust. Studies show that overconfidence (some prefer to call it arrogance) is more likely to set in as people get older and more experienced—when one is at the top of one's game. And paradoxically, the tendency to inflate the reliability of one's own judgment appears to increase when the task at hand is singularly complex, such as estimating market risk. What's more, biologists have documented that overconfidence is actually an adaptive trait. So don't count on natural selection to wipe out the species of cocky bankers. (The New Yorker)"

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