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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Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.


Senior Partner

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Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.