Andrew Hill in the FT has a nice piece on the self-delusion of chief executives such as Sepp Blatter, Li Hejun and Dick Fuld. He could easily have broadened the point into politics. For example, Dan Hodges has said of Ed Miliband:
He created his own world and lived in it. This explains his preternatural calm and his astonishing self-belief — but it also explains why he drove his party over a cliff.
The point here is that there are forces which increase the chances of a leader being self-deluded, for example:
- As Andrew says, self-belief is a valuable trait: the candidate who says "yes, we can" is more likely to get the leadership job than the one who says "I'm not sure about this." But there's a very thin line between self-belief and overconfidence.
- Overconfidence pays. The man who is overconfidence gives more "competence cues" than the more rational one - and hirers mistake such cues for actual competence with the result that the overconfidence candidate gets the job.
- Leaders don't just have limited knowledge - this is true of us all - but biased knowledge. This might be because bosses often hire underlings in their own image. Or it might be because underlings don't want to tell their boss bad news. As Steve Richards wrote of Miliband:
Nearly all those who work for Miliband are dependent on his patronage. He chose them and they are pleased to be close to him. They do not want to say things that he does not want to hear...I am told that sometimes his staff applaud him when he returns from making a mediocre speech.
These mechanisms give rise to the problem famously identified by Kenneth Boulding in 1966:
There is a great deal of evidence that almost all organizational structures tend to produce false images in the decision-maker, and that the larger and more authoritarian the organization the better the chance that its top decision-makers will be operating in purely imaginary worlds.
All this, though, poses the question: if leaders are so often self-deluded, how come so many organizations succeed, or at least don't collapse?
One answer is that not all leaders are narcissists or psychopaths. And some, by accident or design, do manage to preserve cognitive diversity. For example, Churchill and Sir Alan Brooke "could hardly stand one another", but together they suceeded in part because they avoided groupthink.
A second answer - stressed by Oliver Williamson - is that there are benefits of hierarchy. Sometimes, it's better to have decisions taken quickly by one idiot than slowly by committees of idiots or even more slowly by expensive lawyers nit-picking over contracts.
But there's a third answer. Figures from the ONS show that only one per cent of the UK's 2.23 million businesses have more than 100 employees. This fact tells us two different things. One is that diseconomies of scale - of which deluded bosses are just one - are a big constraint; they don't just cause high-profile disasters but, much more often, simply stop firms expanding in the first place.
It also tells us something else - that a company that gets big is doing a heck of a lot right. It could well be that all those right things give the firm enough room - enough monopoly power - to accommodate some dysfunctionality, as long as it falls short of catastrophically bad decisions such as taking over ABN Amro. Adam Smith famously said that "there is a great deal of ruin in a nation." So too is there in an organization.