The Theory of Self-Deception

Here's a handy leadership tip from J.P. Morgan Chase (NYSE:JPM) CEO James Dimon: "You have to fight self-deception. Human beings are experts at it. I do it, too."

I found this advice on J.P. Morgan's website. It is from a June 2009 talk Dimon gave to Harvard Business School graduates on leadership qualities.

Here's the basic lesson: If you employ some guy placing billions of dollars in risky trades, and that guy has been nicknamed, "The London Whale," you should not pretend rising concerns about his trading positions are "a tempest in a teapot."

Dimon is now under fire for more than $2 billion in surprise losses on credit derivative bets that have yet to be fully explained. Some of Dimon's highly compensated executives are now stepping down because of the whale they could no longer fit in the proverbial teapot.

Dimon wisely acknowledged that he too can deceive himself and then unwisely proved his own point.

He also hasn't seemed to fully examine his biggest delusion: That financial firms of unprecedented size do not need any further supervision as they continue placing unprecedented bets in unprecedented times, putting entire economies at risk.

"Look at the facts in a cold-blooded, honest way all the time," Dimon advised graduates of his alma mater in 2009. "At management meetings, emphasize the negatives."

I happen to be good at emphasizing the negatives. Here are the negatives: After Long Term Capital Management's implosion, the Internet bust, Enron, the 2008 financial crisis, a parade of Ponzi schemes, and other assorted financial calamities, we still live in a world where billions of dollars, and even entire firms such as MF Global, can disappear overnight. And in every case, we find executives who've fooled themselves.

"It's important to try to understand yourself deeply," Dimon told graduates. "You all know about I.Q. and E.Q. Your I.Q.s are all high enough for all of you to be very successful, but where people often fall short is on the E.Q. Emotional intelligence is critical. It's something you develop over time. A lot of management skills are E.Q., because management is all about how people function."

Here's what we know about how people function: If you pay them millions of dollars, surround them with fearful or sycophantic underlings, put out press releases about their promotions and let everyone else treat them like celebrities, they are more likely to deceive themselves.

Like gravity, this theory never stops proving itself. Here's what else we just recently learned:

Now, here's the big take away for all you leadership students out there: When you are rich, powerful and successful, self deception is easy. Even Dimon does it.

"What would you want on your tombstone?" he asked graduates. "Think about that when you become a leader. For mine, I just hope they say, 'We miss him, and the world is a better place for him having been here.'"

Imagine that on a banker's tombstone.

(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. The column is published each Tuesday and Thursday at 9 a.m. ET. Contact Al at al.lewis@dowjones.com or tellittoal.com)