Reporting on Davos, Simon Johnson presents a grim picture of CEO reality.  What is even grimmer is that it lines up squarely with Gillian Tett’s report last week on the need, among CEO’s for therapeutic bonding, with Davos as group therapy.

The incursion of clinical psychology into the world of corporate finance is insidious. It emerges even as the Financial Times casts doubt upon behavioral finance in extending psychology into the  political consultation rooms of Obama and Cameron.  Well, at least since the time of Kurt Lewin’s renowned work in changing American consumers’ tastes from white bread to whole wheat during World War II, governments have parlayed incentives with psychology. But the CEO’s situation? That moves us from the realm of Edward Bernays’  psychologically inflected public relations back to the consulting rooms of his father in law, Sigmund Freud.

The problem, of course, is REALITY TESTING which is the “process postulated by Freud which allows the subject to distinguish stimuli originating in the outside world from internal ones, and to forestall possible confusion between what he perceives and what he only imagines” ( LaPlanche & Pontalis, p. 382).

What we are hearing from observers of CEO behavior suggests a grandiosity of belief in the continual willingness of government to support what is “too big to fail”. Fat lot of good that has done for Fine Fail in Ireland, where the government’s guarantee to underwrite banks has finally undone the 23 year rule of that party! Ultimately, resources run out.

What this means for investors (and all of us dependent on markets) is that we are heading for a Titanic situation, integrated by the diminishing capabilities and willingness of governments to sustain the grandiose course of firms, and the groupthink of CEO’s, convinced of a world without icebergs.

Passengers: plan accordingly!

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Titanic Flaw in Reality Testing

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