Does the irrationality of the ruling class feed on itself? I ask because of a new paper which points out that happier people tend to be more overconfident than others - as long as they are unaware that the source of their happiness is irrelevant to the task in hand.
This raises a possibility - that overconfidence can feed on itself, with the result that people who climb to “top jobs” are even more overconfident than others.
I’m thinking of several mechanisms here. They start from the fact that overconfident people are more likely to get promotion than others because they send out competence cues that fool others into believing they are better than they are. Having won one promotion, though, the overconfident individual becomes more overconfident. This is partly because getting the promotion reinforces his high opinion of himself, but also because the better job increases his happiness and hence his overconfidence - a fact reinforced by the positive correlation (pdf) between income and happiness among individuals.
And when the individual “rises” to a certain level, these mechanisms will be reinforced by others. His subordinates will support his decisions - partly out of deference and partly because the boss selects them himself - thus further bolstering overconfidence. And we might add, following Nick Cohen, censorship, self-censorship and deference in the media will further increase his positive self-image.
In these sense, just as there can be bubbles in share prices so too can there be bubbles in individuals’ self-confidence, because of positive feedback effects.
Now, you might reply here: won’t these bubbles eventually get burst as incompetent but overconfident decision-makers get things wrong?
Not necessarily, for two reasons.
One is luck. Even if a decision-maker is no more likely to get decisions right than random chance, dumb luck will cause some to have successful streaks which will further inflate their self-confidence. This is especially likely if those decisions concern tail risk - that is, they consist of taking bets which have a high probability of yielding small positive pay-offs but with the small chance of catastrophe.
Secondly, rulers have immunizing strategies to protect their self-regard. Be it David Cameron blaming poor UK growth upon the euro crisis or Tesco boss Philip Clarke blaming the “challenging economic environment”, they have endless excuses for not acknowledging their mediocrity.
In this sense, perhaps our rulers - bosses and politicians - live in a bubble. I don’t just mean in Charles Murray’s sense of having different backgrounds and lifestyles from others, important as that is. I mean that they are in a bubble of irrational overconfidence about their ability to control complex organizations and societies.