FORECASTS of the end of the world have an even worse track record than economic predictions. Followers of the Mayan calendar believe it will all come to an end next week.
But we have been here before. In 1956, an American group led by a suburban housewife believed a catastrophic flood would destroy the world on a specific date. Concealing his true identity, leading US social psychologist Leon Festinger joined them several months previously. When the flood failed to appear, 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 – cognitive dissonance. He identified a number of factors that must be present for people to intensify their beliefs after they are empirically punctured. For example, the belief must be deeply held and must have led to actions that 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 last week while listening to Lord Dennis Stevenson, former chairman of HBOS, giving evidence to the House of Lords committee on the performance of his bank. Prior to its collapse, 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 made large numbers of risky loans, which were difficult to call in. And his views were sustained by thinking that 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 the US, they become ever more vociferous and shrill.
Most bankers and greens are not barking mad in the same way as many of Festinger’s flood believers. But even high intelligence could not prevent the emergence of cognitive dissonance in the banking community.
Groupthink, with its potentially negative consequences, is a common problem in the corporate world, although 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 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 is an economist at Volterra Partners, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can Revolutionise the World (Faber & Faber).