Cocksure -- Banks, battles, and the psychology of overconfidence
By Malcolm Gladwell
http://www.newyorker.com/reporting/2009/07/27/090727fa_fact_gladwell?pri...
... the first wave of postmortems on the crash suggests a third possibility: that the roots of Wall Street’s crisis were not structural or cognitive so much as they were psychological. ...
... 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. The psychologist Ellen Langer once had subjects engage in a betting game against either a self-assured, well-dressed opponent or a shy and badly dressed opponent (in Langer’s delightful phrasing, the “dapper” or the “schnook” condition), and she found that her subjects bet far more aggressively when they played against the schnook. They looked at their awkward opponent and thought, I’m better than he is. Yet the game was pure chance: all the players did was draw cards at random from a deck, and see who had the high hand. This is called the “illusion of control”: confidence spills over from areas where it may be warranted (“I’m savvier than that schnook”) to areas where it isn’t warranted at all (“and that means I’m going to draw higher cards”). ...
... Of course, one reason that over-confidence is so difficult to eradicate from expert fields like finance is that, at least some of the time, it’s useful to be overconfident—or, more precisely, sometimes the only way to get out of the problems caused by overconfidence is to be even more overconfident. ...
... All that we can say unequivocally is that overconfidence is, as Wrangham puts it, “globally maladaptive.” When one opponent bluffs, he can score an easy victory. But when everyone bluffs, Wrangham writes, rivals end up “escalating conflicts that only one can win and suffering higher costs than they should if assessment were accurate.” ...
About the author:
Malcolm Gladwell is a British-born Canadian journalist, author, and pop sociologist, based in New York City. He has been a staff writer for The New Yorker since 1996. He is best known as the author of the books The Tipping Point (2000), Blink (2005), and Outliers (2008).