Confidence & Hubris

I have just read this article by Malcolm GLADWELL, a Canadian and popular author of a number of hit titles recent (Tipping Point, BLINK). This is an interesting profile that explores the psychological profile of Wall Street Investment Bankers and Overconfidence. Here are some prime quotes;

Most people are inclined to use moral terms to describe overconfidence—terms like “arrogance” or “hubris.” But psychologists tend to regard overconfidence as a state as much as a trait.

Winners know how to bluff. And who bluffs the best? The person who, instead of pretending to be stronger than he is, actually believes himself to be stronger than he is. According to Wrangham, self-deception reduces the chances of “behavioral leakage”; that is, of “inadvertently revealing the truth through an inappropriate behavior.” This much is in keeping with what some psychologists have been telling us for years—that it can be useful to be especially optimistic about how attractive our spouse is, or how marketable our new idea is. In the words of the social psychologist Roy Baumeister, humans have an “optimal margin of illusion.”

The problem was that when, in early 2008, Cayne and his colleagues stood up and said that Bear was a great place to be, the rest of Wall Street no longer believed them. Clients withdrew their money. As the run on Bear Stearns worsened, J. P. Morgan and the Fed threw the bank a lifeline—a multibillion-dollar line of credit. But confidence matters so much on Wall Street that the lifeline had the opposite of its intended effect. As Bill Bamber, a former Bear senior managing director, writes in “Bear Trap: The Fall of Bear Stearns and the Panic of 2008” writes:

"This line-of-credit, the stop-gap measure that was supposed to solve the problem that hadn’t really existed in the first place had done nothing but worsen it. When we started the week, we had no liquidity issues. But because people had said that we did have problems with our capital, it became true... So when we finally got more capital to replace the capital we’d lost, people took that as a bad sign and pointed to the fact that we’d had no capital and had to get a loan to cover it, even when we did have the capital they said we didn’t have."

“When I left,” Cayne told Cohan, speaking of his final day at Bear Stearns, “I had three different meetings. The first was with the president’s advisory group, which was about eighty people. There wasn’t a dry eye. Standing ovation. I was crying.” Until the very end, he evidently saw the world that he wanted to see. “The second meeting was with the retail sales force on the Web,” he goes on. “Standing ovation. And the third was a partners’ meeting that night for me to tell them that I was stepping down. Standing ovation, of the whole auditorium.”

That pretty much seems to sum them up.