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Carol Craig is the Centre's Chief Executive. She is author of The Scots' Crisis of Confidence, Creating Confidence: A Handbook for Professionals Working with Young People, The Tears that Made the Clyde: Well-being in Glasgow and The Great Takeover: How materialism, the media and markets now dominate our lives. Her latest book is Hiding in Plain Sight: Exploring Scotland's ill health. She is Commissioning editor for the Postcards from Scotland series. Carol blogs on confidence, well-being, inequality, every day life and some of the great challenges of our time. The views she expresses are her own unless she specifically states that they reflect the Centre's thinking.

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Posted 09/10/2008

When I give talks I regularly point out that psychologists don’t  use the word confidence very much. The academic subject which tends to use the concept of confidence most is economics. Never has that been clearer than in current times.

A common dictionary definition of confidence is ‘trust in self and others’. In the current environment what triggered the crisis in the money markets, making them freeze up, was a break down in trust. Bankers stopped lending to one another because they didn’t trust one another.

Banking is founded on trust. I’ll only put money in a bank if I trust those that run it not to steal it from me and to use it wisely. For centuries the Scots have been seen, internationally, as a people of high moral principles and integrity and this aided the development of a successful banking industry.

However, in the past few years throughout the world, old fashioned notions of  integrity or prudence have been replaced by the desire for growth and making a quick buck. Even the Conservative Party in the UK are making a big play of the fact that much of the current banking crisis has been driven by personal bonus systems which rewarded individuals for bringing in business which may look good in the short term but is disastrous for the organisation in the long-term.

For the past few weeks I’ve been saying that when the analysis is undertaken of what went wrong I’m sure that one of the factors at stake is that as a society we have become too cavalier about financial risks: too optimistic. Thus individuals were prepared to take on huge mortgages which they could never hope to pay off from their meagre earnings and banks were equally cavalier about lending money. This has been particularly true in America where the toxic debt from what is euphemistically called ‘subprime mortgages’ has been at its greatest.

In various blogs I’ve warned about the dangers of mindless positive thinking. Particularly the type that encourages people just to believe that good things will happen just because they want it to. ‘Just put your desires out to the universe and your needs will be met’. Oh really.

We must always remember that pessimism has an important part in human existence: we wouldn’t survive as a species if we didn’t think the worst could happen. There can be times when  trying to boost optimism can be beneficial. However, optimism enhancing techniques are never appropriate when the costs of failure are high – and this very specifically means not trying to bolster optimism when it comes to paying off debt.

Hersh Shefrin, a professor of economics at Santa Clara University, claims that what has caused the current ‘fiasco’ in the economy has largely to do with psychology, particularly people’s tendency (at least in the US) to think that negative events are more likely to happen to other people than to you. For many people that positive bubble may be about to burst.

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