There’s no such thing as a sure thing

A banker

Of course there isn’t.  We all knew that.  Even the investment bankers who have triggered, as G W Bush put it, some ‘adjustments’ to the world’s financial systems, knew it.  Why, then, did they behave as if there was?

Yet again, it’s all psychology.  Economics plays no part whatsoever.  If they had behaved rationally, they wouldn’t have built an enormous bubble of pretend money using financial instruments that the vast majority of them (including, critically, those at the top of the firms which have failed) didn’t understand.

The situation obviously wasn’t helped by deregulation or rather, self regulation.  (‘Now children, here’s a big box of delicious sweets.  I am going now, but I want you to make sure that none of them are eaten although frankly I’m not that bothered.’)  But at the root of it is good old cogintive dissonance.  If you’re paying yourself a few million (or tens of millions, in some cases) a year you really want to believe that the machine that’s generating all that pretend money is reliable, fault free and will continue to do so, even though deep down you have an uncomfortable feeling that it can’t.  Cognitive dissonance simply says that if you want to believe something you will, despite any evidence that your belief makes no sense whatsoever. 

If you come across a fact or argument that is ‘dissonant’ with your belief, you rationalise it away so that you can hold on to your beliefs.  Beliefs are very much more important to us than facts – they are a vital part of the mental models we use to understand the world around us.  And as I’ve mentioned in posts on cognitive behaviour therapy, you feel how you think.  These guys really did think that they’d mastered the system and it made them feel good.  They certainly didn’t want to think that they were wrong.

But they were, and spectacularly so.  Astonishing, isn’t it, that no one spotted this coming?  Actually, no: It’s not astonishing at all.  Most of those who might have spotted it, and done something about it – notably our governments, which deregulated financial markets in the first place – were subject to cognitive dissonance as well, of course.   They couldn’t afford to admit that they’d allowed far too much deregulation.  And they really did convince themselves that the children would behave, even when faced with a very large box of delicious sweets.  

Virtually everything seems obvious with hindsight.  But we often don’t spot obvious things in advance. There are good reasons for cognitive dissoance being part of our highly evolved mental software: we need well developed mental models to make sense of the world around us.  But these internal models can have dangerous side effects.   As Mark Twain said, we can easily end up ‘believing things that just ain’t true’.

Here’s the BBC’s Robert Peston writing on his blog this morning:

“The breathtaking rises in the price of bank shares this morning are symptomatic of a stock market that is bereft of reason and is being driven almost purely by hysteria and momentum.”