Bankers, Greens and the Barking Mad: When Prophesy Fails

Forecasts of the end of the world have an even worse track record than predictions in economics.  Some followers of the Mayan calendar believe the world will end next week.

But we have been here before.  In 1956, an American group, led by a suburban housewife, believed that a catastrophic flood would destroy the world on a specific date. Concealing his true identity, a leading American social psychologist, Leon Festinger, had joined them several months previously. When the flood failed to happen, he noted that, far from abandoning their beliefs, the members became even fervent in their view that the world was about to end.

Festinger used this evidence to develop a key concept in psychology, that of cognitive dissonance. He identified a number of factors which need to be present in order for people to intensify their belief following its empirical disconfirmation. For example, the belief must be deeply held and has to have led to actions which are difficult to undo. In addition, the individuals in the group need to give each other support across their social network.

The concept of cognitive dissonance sprang to mind listening to Lord Dennis Stevenson, former chairman of HBOS, giving evidence to the House of Lords committee on the performance of his bank last week. Prior to the actual collapse of his bank, it seems that nothing could persuade him that there were problems.  The freezing of the interbank loan market in the late summer of 2007, for example, was easy to reconcile with the belief that everything was fine. HBOS had already made large numbers of risky loans, which were difficult to call in.  And, of course, his views were sustained by the group-think which dominated the banking sector as a whole.

Another example is the blind fury with which some environmentalists have greeted the increasing realisation that shale gas completely alters the future path for energy and emissions. We no longer need to wear hair shirts and abandon capitalism.  But far from reappraising their views in the light of the empirical evidence of what has happened in America, they become ever more vociferous and shrill.

Most bankers and greens are not barking mad in the way in which many of Festinger’s flood believers were. But even high intelligence could not prevent the emergence of cognitive dissonance in the banking community.

Groupthink, with its potentially negative consequences, is in fact a common problem in the corporate world.  It is not usually as lethal as full-scale cognitive dissonance. If a company plans to make a profit but actually makes a loss, behaviour tends to alter.  But the lack of a challenge to the consensus can lead to very bad decisions.  We may need to revive the concept of the Court Jester, a small, highly paid unsackable group of individuals, whose sole function is to constantly challenge the prevailing beliefs in a company. They would certainly get up people’s noses, but better that than a banking crisis or disastrous acquisition.

Paul Ormerod

As published in City AM Wednesday 12th December

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