Why Power and Money Make Smart People Decide Badly

You would expect the people with the most power and the most money to be the calmest, clearest thinkers in the room. The opposite is usually true.

The very things that make someone powerful or rich - confidence, control, high stakes, a public reputation to protect - bend their judgment in predictable ways. A CEO overpays for a company. A fund manager rides a loser all the way down. A boss surrounds himself with people who never say no.

This article shows you exactly how power and money warp decisions, so you can spot the bend in a boss, a famous executive, a fund manager, or yourself the next time you have authority or cash on the line.

Why this matters

Most advice about good decisions is aimed at ordinary, everyday choices. But the decisions that affect the most people - who gets hired, which company gets bought, where billions of dollars flow - are made by leaders and investors. And those are exactly the people whose biases get amplified, not calmed, by their position.

Here’s the uncomfortable part: knowing about these biases barely protects you from them. Confidence feels like competence. A rising market feels like skill. The pull to defend a failing project feels like loyalty. You can’t think your way out in the moment.

So the goal isn’t to become immune. It’s to recognize the pattern early and build guardrails before you need them.

The key idea: Power and money don’t make people more rational. They reliably make people more biased - more confident, more committed to past choices, less able to hear “you’re wrong.” The cure is never willpower. It’s structure.

Part 1: How power bends a leader’s judgment

Four forces distort how people in charge decide: misaligned incentives, overconfidence, commitment to past choices, and the warping effect of power itself. Let’s take them one at a time.

The principal-agent problem: why incentives get gamed

This is one of the most important ideas in all of business, and it sounds more complicated than it is.

A principal is the person who owns something - a company’s shareholders, a store owner. An agent is the person hired to act on their behalf - a manager, an employee, a fund manager. The trouble is that the agent usually has different goals and better information than the principal. So the agent quietly optimizes for their reward, not for what the owner actually wants.

Three ideas make this worse:

• Information asymmetry. One side knows more than the other. The manager knows whether the project is really on track; the owner only sees the report the manager chooses to send.
• Moral hazard. When someone can take risks but doesn’t bear the full cost if they go wrong, they take too many.
• Goodhart’s Law. “When a measure becomes a target, it stops being a good measure.” The moment you reward a number, people chase the number instead of the real goal behind it.

Goodhart’s Law is the one that gets companies into the news.

A real case: In 2016, Wells Fargo pushed an aggressive sales target it called “Eight is Great” - get every customer into eight products. Staff who couldn’t sell that fast simply opened roughly 2 million fake accounts customers never asked for. About 5,300 people were fired, the bank paid over $3 billion in fines, the CEO lost his job, and regulators capped how big the bank could grow. The leaders measured “accounts opened.” So that’s exactly what they got - even when it was fraud.

The common mistake here is believing that stronger incentives fix bad behavior. Often they make it worse. A big bonus tied to one narrow number gives people a powerful reason to game that number, even by cheating. Balanced metrics, equity that vests slowly over years, and clawback rules (“we can take the bonus back if it turns out to be fake”) all work better than one giant carrot.

CEO overconfidence and empire-building

The higher someone climbs, the more sure they tend to feel.

Researchers Ulrike Malmendier and Geoffrey Tate studied CEOs and found that overconfident leaders systematically overpay for the companies they buy and over-invest in their own firm. They believe their company is undervalued, and that they personally can run any target business better than its current owners.

The market often sees through it. When an overconfident CEO announces an acquisition, the stock price tends to drop on the news - investors are essentially saying, “He’s overpaying again.” Think of AOL buying Time Warner, or Quaker buying Snapple: famous, value-destroying deals driven partly by ego.

Escalation of commitment: throwing good money after bad

Escalation of commitment means pouring more resources into a failing decision just to justify the resources you already spent. It’s the leader’s version of the sunk-cost fallacy. Walking away would mean admitting the original call was wrong - and that stings, especially in public.

The classic example is the Concorde, the supersonic jet. Britain and France kept funding it for years after it was clearly going to lose money, simply because they’d already invested so much. The trap is sometimes nicknamed the “Concorde fallacy.”

Think of it like staying in a two-hour movie you hate because you “already paid for the ticket.” The ticket money is gone either way. The only real choice left is whether to waste the next two hours too.

How power itself rewires the brain

Psychologist Dacher Keltner describes what he calls the power paradox: the empathy and perspective-taking that help people gain power tend to fade once they have it.

In one memorable study, people who were primed to feel powerful were more likely to draw the letter “E” on their own forehead facing themselves - so it looked backward to everyone else. A tiny sign that power makes you forget how things look from someone else’s point of view.

Power tends to make leaders act faster, take more risk, listen to less advice, and pay less attention to information that disagrees with them. None of this means they’re bad people. It’s a predictable shift in how the brain works under power.

How to lead against your own biases

You can’t out-willpower this. You have to build dissent into the structure so you don’t have to rely on being strong in the moment.

1. Run a pre-mortem. Before you commit, ask: “Imagine it’s a year from now and this failed badly - why?” It gives people permission to name risks out loud.
2. Appoint a red team. Give a small group the explicit job of attacking the plan and finding its weakest points.
3. Set kill-criteria in advance. Decide now: “If we don’t hit X by date Y, we stop.” It removes the ego from the later decision.
4. Separate the starter from the continuer. The person who launches a project shouldn’t be the one who decides whether to keep funding it. They’re too invested to be honest.

Part 2: How money bends an investor’s judgment

Now to the markets. Behavioral finance is simply the study of how real investors actually behave - emotionally and irrationally - rather than how textbook theory says a perfectly logical investor should behave.

Markets run on two ancient emotions: fear and greed. And almost every investing mistake traces back to one master idea.

The master key: loss aversion

Loss aversion means that losing $100 hurts about twice as much as gaining $100 feels good. Researchers Daniel Kahneman and Amos Tversky measured the ratio at roughly two-to-one.

That single fact explains most of the errors below.

• The disposition effect. Selling winners too soon and holding losers too long. Selling a winner locks in a feel-good win. Selling a loser forces you to admit a mistake - so people hang on, hoping it climbs back to what they paid. Studying around 10,000 brokerage accounts, Terrance Odean found investors did exactly this, and the losers they kept went on to underperform the winners they dumped.
• Overtrading. Overconfident investors think they can beat the market, so they trade constantly and pay it all away in fees, spreads, and taxes. In one famous study, the most active traders badly trailed the overall market. In Barber and Odean’s “Boys Will Be Boys” study, men traded 45% more than women - and that overconfidence directly cost them returns.
• Herding. Following the crowd. Rising prices seem to “prove” the crowd is right, which pulls in more buyers, which pushes prices higher still - a bubble. Then it pops into a panic and everyone runs the other way.
• Recency bias. Treating the recent past as the future - buying after a rally, selling after a crash. This is why the average investor often earns far less than the market itself.

That last gap is bigger than most people realize. In 2024, the average equity investor earned about 16.5% while the S&P 500 returned about 25% - a gap of roughly 8.5 percentage points, given up mostly by panicking out right before the rebound.

History keeps rhyming: Tulip mania in 1637, the dot-com bubble in 2000, the 2008 housing crash, the GameStop meme-stock frenzy in 2021, and repeated crypto cycles all follow the same shape. Greed-fueled boom, herd piles in at the top, fear-fueled crash, herd sells at the bottom. CNN even publishes a Fear & Greed Index that tries to gauge where the market’s mood sits today.

Picture the market as a crowded theater. When someone shouts “fire!” - a crash - everyone rushes the exit at once and gets crushed in the doorway, selling at the worst possible moment. The disciplined investor is the one who checked beforehand that the building wasn’t actually on fire, and quietly stayed seated.

Common misconceptions

• “More money on the line makes me focus and decide better.” Reality: higher stakes amplify loss aversion. The bigger the position, the harder it is to think clearly about it.
• “If my portfolio is up, I must be skilled.” Reality: this is self-attribution bias - taking credit on the way up (“I’m good at this”) and blaming bad luck on the way down. A bull market can make almost anyone look like a genius.
• “My purchase price tells me whether to sell.” Reality: the market doesn’t care what you paid. The only real question is whether you’d buy it today at its current price.
• “Just knowing about these biases protects me.” Reality: it barely does. Awareness is not a defense. Structure is.

How to invest against your own brain

Because emotion overpowers willpower in the heat of the moment, the fixes are all structural. You decide once, in a calm state, and let the system carry it out.

1. Automate your contributions. Use dollar-cost averaging - invest a fixed amount on a fixed schedule - so emotion never makes the call.
2. Rebalance on a calendar. Resetting your mix on set dates mechanically forces you to buy what’s down and trim what’s up.
3. Treat inactivity as intelligence. Warren Buffett’s “20-punch-card” idea: imagine you only get 20 trades in your entire life, so each one must count. Fewer decisions means fewer mistakes.
4. Write an investment policy statement. Put your rules in writing during calm times, then follow them during panicked ones.
5. Remember the order of operations. “Time in the market beats timing the market.” Or as Buffett puts it: “Be greedy when others are fearful, and fearful when others are greedy.”

Conclusion

Look closely and you’ll see leaders and investors falling into mirror-image traps. Overconfidence makes a CEO overpay for an acquisition and makes a trader overtrade. Ego makes a leader cling to a failing project and makes an investor ride a losing stock down. Gamed incentives produce fake accounts in one arena and recency-chasing in the other. A fear of dissent fills a boardroom with yes-men and fills a market with a stampeding herd.

The single takeaway worth keeping: the most dangerous decision-maker is a confident, powerful, or wealthy one who believes they’re immune to bias. Power and money are a magnifying glass held over your judgment - they enlarge whatever bias is already there. So assume you’re biased by default, especially when you hold the most authority or have the most at stake, and replace willpower with structure.

Which raises a sharper question worth sitting with: if awareness alone can’t save us, what actually can train better judgment over a lifetime - and is it something you build, or something you have to design your environment to do for you?