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Why Rich and Powerful CEOs Make Bad Decisions

The more people talk about CEO pay and bankers' bonuses, the less sense emerges. Wall Street feels entitled; Main Street feels enraged. Across a chasm they scream at each other, pious and proud to be deaf.

I see two issues here: the bubble of power and the problem of money. Today, I'll attack the former, explaining the top three reasons why the bubble of power is so dangerous.

1. Power and privilege insulate, keeping executives in the dark.

Men (and the few women) in power have a problem which, because it looks like a privilege, they don't understand. They're cut off from the world the rest of us inhabit. Sometimes this is literally so: encased in limousines, shepherded onto private jets, cosseted by personal assistants, they inhabit a bubble. This feels lovely of course, and is justified by arguments about efficiency and the importance of their time. I used to inhabit this world; I found it interesting, seductive and dangerous. But the most exaggerated version of this was Dick Fuld, CEO of Lehman Brothers who could travel from his Connecticut home to his 31st floor office and never meet anyone except his chauffeur and his pilot.

The problem is that the luxuries you enjoy come at a cost: isolation. The bubble of power seals off bad news, inconvenient truths, hostile opinions and messy realities. Like the cave dwellers of Plato's parable, they powerful see only shadows of reality flickering on their walls, grateful for protection from external realities. This feels wonderful but far from being a privilege represents a risk only the smartest CEOs recognize and deal with.

2. Power clouds judgment.
Recent research shows that the powerful appraise information differently too. In one experiment, academics got together to see if power alters judgment. They divided students into two teams: one group had the power to choose applicants for an internships; the other could advise - but not decide. Those with the decision-making power paid more attention to information that conformed to stereotypes. Having power made them less inclined to challenge conventional wisdom.

If that weren't scary enough, the researchers tested all their volunteers for the need for dominance. They found that the students who really needed to dominate paid less attention to challenging or provocative information. They were more prone to snap judgments and more likely to conform to conventional views. The stereotypes they fall back on can be counteracted - but doing so requires a great deal of motivation and cognitive effort.

3. Powerful people speak a different language, quite literally.

Frances Milliken, an academic at NYU's Stern School of Management, did a marvelous study mapping how this was reflected in the language used by powerful people. She found that when they're confronted by risky situations, they're more optimistic. They tend also to think more abstractly than others. But what is frightening about Milliken's study is that the combination of power, optimism and abstract thinking makes powerful people more certain they're right. The more cut off they are from others, the more confident they become.

When I first read Milliken's research, my first thought was of Michael Brown, head of FEMA during Hurricane Katrina and Alan Greenspan, blinded by the 'flaw' that the banking crisis had revealed in his so-called 'ideology'. Now my mind jumps to Tony Hayward at BP, Irene Rosenfeld at Kraft, Lloyd Blankfein doing 'God's work' at Goldman Sachs and the remote mountain tops of Davos.

Who does the research remind you of?

image courtesy of flickr user, codepinkhq