A crisis of (over-)confidence?
Malcolm Gladwell is probably the world’s most famous “pop” sociologist. His work often focuses on “how little things can make a big difference,” to quote the subtitle of his bestseller The Tipping Point. No surprise, then, that the financial crisis has caught his attention. Here, he argues that the roots of Wall Street’s crisis were in large part psychological: The overconfidence of many of those working in financial markets, he argues, led them to suffer from the “illusion of control” – an inability to recognise both the limits of their own knowledge and their capacity to control events. Can such overconfidence be reined in? Not easily, says Gladwell: Confidence is the lifeblood of financial markets everywhere, and it’s usually the most confident (and even overconfident) players who score the biggest wins. But if everyone becomes overconfident – i.e., if everyone acts in the hope that their bluff won’t be called – realistic assessment of risks and rewards goes out the window.