Malcolm Gladwell is surely right to say that the root of Wall Street's failure does not lie in under-regulation or ignorance, but in psychology. Specifically, in overconfidence, in excessive ungrounded self-esteem. Link here.
I am happy to welcome him to the club of those who have argued as much in the past. Here is a post I wrote a year ago on the same point. Link here.
As Gladwell states, his approach owes more to psychology and less to ethics. Thus, he avoids terms like arrogance and hubris. For my part I am comfortable to consider that there is an ethical dimension behind the overconfidence of certain members of the financial community.
In my view overconfidence is a moral hazard of the therapy culture. When you are in the business of producing positive self-esteem even when reality is telling a largely different story, you are fostering overconfidence.
According to Gladwell, overconfidence is not a failure to adapt to changing circumstances, but a failure to understand that you might have to adapt. Being overconfident means that you do not have to negotiate with reality but that you are so great that you can create your own reality.
In my view anyone who believes that he does not have to adapt to reality has mistaken himself for a god. He simply does not know who he is.
Gladwell continues that overconfidence involves blurring the line between what we can control and what we think we can control. Psychologists have devised tests where people who have great skill playing games where skill matters tend also to believe that their skill can prevail in games of pure chance.
Here I agree entirely. I have observed in my coaching practice and noted on this blog cases where people who have great talent in one area of life assume that their talent extends to all other areas of life.
The most recent example was Gov. Mark Sanford, a man who had great political abilities, but who was completely out of his league in the game of romance. Link here.
But Gladwell also points out that there are situations where overconfidence is a good thing. Studies show that players who are the best at bluffing are not merely good at pretending that they have better cards than they do but are convinced that their cards are stronger than they are.
Evidently, this is complicated. Will the best poker player be so delusional that he will think that his pair of jacks is really a royal flush? Perhaps he will.
Gladwell's most important point is that it does not quite matter how confident you are. More important is whether others are confident in you. Bear Stearns collapsed because its bankers lost confidence in it, and refused to lend it any more money.
Could that have been averted if James Cayne had been even more overconfident that he was? That is Gladwell's suggestion. To me that does not feel correct.
Nonetheless Gladwell is certainly correct to mention that there are good and bad forms of overconfidence. I would say that good overconfidence occurs when someone important believes in you more than you believe in yourself. The confidence boost you get from that person's support may make you feel overconfident, but it is decidedly constructive.
If confidence derives from success, and if confidence breeds success, where does that first bit of confidence come from? How do you feel confident when you are first entering a competition?
It may come from your success in other competitions, but then we could still ask where the first feeling of confidence came from? In my view it must come from someone else... a parent, a lover, a spouse, a boss.
Someone has to believe in you before you believe in yourself.
If that person's confidence is borne out by your success, the two of you will build a bond of trust. You will trust that person's judgment, but you will also be in his debt.
Confidence must constantly be tested in competition. If you try to live too long on your laurels you will find that at some point other people will lose confidence in you. And that will be a dark day indeed.