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When tennis star Andre Agassi's career was suffering and his relationship was on the rocks, he did crystal meth. This was a time of nemesis, Foster says. Bankers, on the other hand, floating high on a bubble economy, "injected dodgy sub-par mortgage securities into collateralized debt obligations during the credit boom and mercilessly served them up to investors." This was a time of hubris. Foster's theory to us seemed improbable at first. Was it possible that bankers acted with the same licentiousness as a celebrity sports star wilting under the pressure of public scrutiny? What a long bridge had to be built to link the two! Perhaps not. According to Malcom Gladwell in a July New Yorker article, "The psychology of overconfidence": Since the beginning of the financial crisis, there have been two principal explanations for why so many banks made such disastrous decisions. The first is structural. Regulators did not regulate. Institutions failed to function as they should. Rules and guidelines were either inadequate or ignored. The second explanation is that Wall Street was incompetent, that the traders and investors didn't know enough, that they made extravagant bets without understanding the consequences. "But," he says, "the first wave of postmortems on the crash suggests a third possibility: that the roots of Wall Street's crisis were not structural or cognitive so much as they were psychological." Following this path, Gladwell presents the argument that in the environment of moral hazard that was Wall Street only recently, overconfidence might have been a killer. This last explanation echoes somewhat the theory behind celebrity scandal: that hubris, entitlement and thrill cause people in the public eye to do stupid things like sleep with a White House intern or a high-end call girl. It also does something to bolster Foster's hypothesis. And there's more from Gladwell: Several years ago, a team headed by the psychologist Mark Fenton-O'Creevy created a computer program that mimicked the ups and downs of an index like the Dow, and recruited, as subjects, members of a highly paid profession. As the line moved across the screen, Fenton-O'Creevy asked his subjects to press a series of buttons, which, they were told, might or might not affect the course of the line. At the end of the session, they were asked to rate their effectiveness in moving the line upward. The buttons had no effect at all on the line. But many of the players were convinced that their manipulation of the buttons made the index go up and up. The world these people inhabited was competitive and stressful and complex. They had been given every reason to be confident in their own judgments. If they sat down next to you, with a tape recorder, it wouldn't take much for them to believe that they had you in the palm of their hand. They were traders at an investment bank. That bankers perceive themselves to be more effectual than they really are, we can buy. Though we probably wouldn't call it the "Agassi Syndrome." Either way, the question then is: What can be done? According to Foster, the only way to check the err of overconfidence is to put in place enough regulation to infuse the fear of God in "the most hardened adrenalin junkie." However, Gladwell also notes that overconfidence, particularly on Wall Street, can be an advantage since investment bankers borrow billions on the terms that they are able to pay it back. He cites Harvard biological anthropologist Richard Wrangham, who writes, "In conflicts involving mutual assessment, an exaggerated assessment of the probability of winning increases the probability of winning. Selection therefore favors this form of overconfidence." Wall Street rests on confidence and perception, and may even be propelled by the swagger of self-important bankers. But in that upward trajectory there is a tipping point. And it seems, we reached that. - Sara BehunekRead Gladwell's piece here See Also from The Deal: Is the recession sending financiers to rehab?
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Mike Foster of Financial News 
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Thanks for a great piece and provocative analysis.