The Affairs Organizer Blog

An interesting article in The New Yorker by Malcolm Gladwell about the psychology of overconfidence and how it relates to the behavior (and losses) of banks in the sub-prime meltdown.

Excerpts:

“One of the things that happen to us when we become overconfident is that we start to blur the line between the kinds of things that we can control and the kinds of things that we can’t.”

“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.”

“As novices, we don’t trust our judgment. Then we have some success, and begin to feel a little surer of ourselves. Finally, we get to the top of our game and succumb to the trap of thinking that there’s nothing we can’t master. As we get older and more experienced, we overestimate the accuracy of our judgments, especially when the task before us is difficult and when we’re involved with something of great personal importance.”

When looking to understand what happened in this meltdown, also consider Joe Nocera’s “Risk Management” article in The New York Times Magazine which skewers the “Value At-Risk” method of risk management employed by most banks.