"This meltdown is not just a financial event, but also a cultural one. It's a big, whopping reminder that the human mind is continually trying to perceive things that aren't true, and not perceiving them takes enormous effort."
-- David Brooks, in his op-ed column, "The Behavioral Revolution," in today's New York Times. On the Dow's second-best day ever, marking an 889-point gain, we need to keep in mind what pitched us into the market meltdown. Brooks' column is a fascinating take on how faulty decisions get made--frequently because of errors of perception. Brooks cites author Nassim Nicholas Taleb, whose books Fooled by Randomness and The Back Swan were, as he says, "broadsides at the risk-management models used in the financial world and beyond." One common error of perception, according to Taleb, is a tendency to see data that confirm our prejudices more vividly than data that contradict them. This can lead to group think and dangerous decision-making.
Reading Brooks' column, I couldn't help but think about an interview I did last year with Jami Miscik, who headed the CIA's intelligence directorate before she moved to Wall Street in 2005 and became global head of sovereign risk at Lehman Brothers. Since Barclays (BCS) bought Lehman's North American operations last month, Miscik has stepped into the same role at the big British bank. But last summer, she explained to me how errors of perception--the very type that Brooks and Taleb cite--led her and other government experts, from President Bush on down, to mistakenly believe that Saddam Hussein had weapons of mass destruction. In my Fortune profile of Miscik last year, she explained how a senior analyst trains a junior analyst and passes on his view--and that junior analyst then passes on that same view to the next analyst. Sound familiar? "You need to rigorously examine inherited assumptions and at all costs avoid group-think," Miscik said.
Indeed, in financial markets and geopolitics, the rule equally applies.
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