Psychologists explain financial market madness

MELBOURNE -- Some economists have described the Great Financial Crisis (GFC) as the worst financial downturn since the Great Depression of the 1930s. While data on the causes and effects of the economic catastrophe are still being gathered, a group of global psychologists are providing some insights.

Co-edited by RMIT University's Adjunct Professor Susan Long, Towards a Socioanalysis of Money, Finance and Capitalism is a book that applies psychoanalysis to explain the decisions which triggered the financial collapse.

"Many key factors that led to the financial crisis were due to wishful thinking, when leaders fooled themselves that various risks could be overcome despite evidence to the contrary,” RMIT University's Adjunct Prof. Long explained.

The book is based on a study that suggests that fear and anxiety among the highest level of management contributed significantly to the disaster.

"Making important and risky decisions under these circumstances leads to increased anxiety," Adjunct Prof. Long said.

"Too often that anxiety is managed by bravado, avoidance or other such defences. These can become collective defences and part of the culture."

The book describes a common culture among financial institutions of recklessness and a lack of awareness of the impact of their decisions.

"Bad decisions occur due to arrogance, extensive ego-involvement, group pressure and blind competitiveness," Adjunct Prof. Long said. "Perhaps they do this because of ego-investment or anxiety, while some come from peer pressure to conform despite one's better judgment."

The book also examines some of the root causes of the GFC such as a narcissistic "me first" mentality, a theme that is further explained in an ABC radio interview with Adjunct Prof. Long.

Adjunct Prof. Long, who is also President of the Psychoanalytic Studies Association of Australasia, co-edited the book with Emeritus Professor Burkard Sievers from the Schumpeter School of Business and Economics at Bergische Universität Wuppertal, Germany.

Contributions to the book came from Australia, Denmark, France, Germany, Hungary, Sweden, the Netherlands, the U.K. and the U.S. The examples from each country all reflected similar themes.

Image: Katrina.Tuliao

This post was originally published on Smartplanet.com