"Between Hubris and Vision"

Source: Shankar Vedantam, The Washington Post, March 12, 2009

In this article from his regular series on psychology, Vedantam addresses the impact of confidence on behavior and of status on confidence. He cites an experiment in which the researcher had

one group of volunteers recall a time in their lives when they felt powerful and another group recall a time when they felt powerless. All of them were then seated in a room uncomfortably close to a fan blasting air at them. Those who had been reminded of feeling powerful tended to switch off the fan or divert the blast. The poor volunteers who had recalled feeling powerless mostly sat and shivered.

He extrapolates

the central characteristic of power is not that it triggers optimism, self-esteem and action -- all of which are true -- but that it produces a sense of control.

Bringing the concepts home to current problems, Vedantam cites other research:

Financial titans may believe they can get away with extraordinary risks for no better reason than that they happen to be financial titans.

Between 1998 and 2001, shareholders of companies that acquired other companies lost $240 billion of value after the merger announcements, according to research by Sara B. Moeller at the University of Pittsburgh and others. And an unusual 15-year analysis conducted by Ulrike Malmendier and Geoffrey Tate at the University of California found that personal overconfidence among CEOs appeared to be a potent predictor of excessively risky takeovers.

Comment: This is another example of the reality that we think with our brains with which we also feel our emotions, and the two get mixed up.

Perhaps it is a good thing that we have academics and historians, who pretty much lack power and political or economic influence, to analyze the decisions made by the rich and powerful, and help the rest of us to understand when and why the system is going haywire.

Perhaps also, we should be a little wary when these thoughtful people are suddenly put into positions of government power that their historical analytic accuracy may not accurately predict their practical performance. Still, I would rather have good economists taking charge of economic policy in the current situation than titans of wallstreet. JAD