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A crisis of (over-)confidence?

21 December 2009

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.

3 Responses leave one →
  1. W. Bell permalink
    December 30, 2009

    Dominic Johnson at the University of Edinburgh and James Fowler at the University of California created a mathematical model of the way overconfident individuals compete against ordinary individuals. Their model suggests that overconfidence actually maximizes individual fitness and populations will tend to become overconfident, as long as the resources at stake during conflicts exceed twice the cost of competition. They argue that the fact that overconfident populations are evolutionarily stable may be one reason why overconfidence persists today in politics, business, and finance, even if it causes occasional disasters. Their article is here

  2. January 6, 2010

    Many economists already account for psychology – Animal Spirits by economists Akerlof and Schiller being a very timely book published very soon after the credit crunch.

    Who needs pop psychologists? – and does their analysis add anything new or advantageous to Akerlof and Schiller’s?!

  3. Joanne Gardner permalink
    January 25, 2010

    Let’s call it like it really is…A FINANCIAL CRISIS! Instead of dealing with Healthcare (which the majority of the people do not want), let us focus on jobs and the economy and quit acting like there is no problem. All one needs to do is look at the states with the highest unemployment and see the devastation and poverty and the over confidence goes out the window.

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