Using Theories of Leadership Derailment to avoid the Next Global Crisis

May 20th, 2010 by Amanda Potter Leave a reply »

Human judgement and decision making played a central role in the events that led to the deepest global crisis for decades. Surely psychology can illuminate why things went so wrong and help provide guidance on how to stop such mistakes being repeated? To help find out, on 16 March the British Psychological Society and the Parliamentary Office of Science and Technology (POST) jointly held a free, public seminar on Behavioural Economics at the House of Commons.

Stephen Lea, Professor of Psychology at the University of Exeter, recommended that the country’s debt could be reduced by targeting three psychological factors: materialism, the money illusion and myopia.
* Materialism is the belief that having more things will make you happier, yet Lea said people who believe this tend to be less happy than most.
* The money illusion is the tendency for people to feel twice as rich when inflation doubles the money they have in their pocket, when the reality is that they are no better off.
* Myopia, Lea explained is ‘our comprehensive incompetence at thinking long-term’. Psychology is a necessity for understanding economic behaviour, Lea concluded, not an optional extra.

Last up, David de Meza, Professor of Management at LSE, highlighted the role that unrealistic optimism has played in the global financial crisis. Most people overestimate their financial abilities, for example in relation to trading stocks. In fact, people with some financial knowledge are more likely to fall victim to scams than those without. One study highlighted by De Meza analysed all the trades made by 37,000 people from 1991 to 1997, finding that the more trades people made, the more money they tended to lose. Men were particularly prone to overconfidence, making 45 per cent more trades than women (Professor Marteau later joked that perhaps future economic crises could be averted by placing pessimistic women in positions of financial responsibility).

De Meza believes the findings he reviewed suggest that the financial crisis was caused by unrealistic optimism, not bankers exploiting the promise of government bail outs.

Zircon are working with organisations to help them identify and manage leadership derailment and the reasons why leaders fail. If you would like to understand more about this service please call Amanda on 01737 555 862.

Adapted from source: The Psychologist, vol. 23 no. 5, page 374 – May 2010

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