overconfidence

Overcoming Overconfidence

This article was originally published by our friends at The Economist’s Executive Education Navigator and is reposted here with permission.

A healthy level of confidence is important for getting ahead in business – so you can likely thank confidence (along with many other things!) for the position you’re in today. While you’re securely in (or approaching) a leadership position, it may be wise to step back and check that overconfidence won’t hurt your future decision-making. High rates of entrepreneurial failures and the “winner’s curse” oft attributed to mergers and acquisitions are just two examples of the popular danger of unrealistic optimism.

How Much Is Too Much

Maybe your friend who dabbles in the stock market is overly optimistic about the future, taking bets on businesses that he or she doesn’t properly understand despite your explanations that if their brilliant analysis is causing them to buy a company, someone else’s brilliant analysis is causing them to sell it.

But financial markets are a world for warring levels of confidence, and you’re a rational, level-headed professional, right? A 2007 study by Dan Moore and Paul Healy that consolidated a lot of the literature on overconfidence makes it easy to check. Moore and Healy identify three core attributes associated with overconfident behaviour (and they are a lot more common than you might think). The questions to ask yourself are:

1) Do you overestimate your ability to achieve particular tasks? (Think whether the sales targets you gave yourself have always been met, or the self-imposed deadlines always honoured?)
2) Do you believe that some of your abilities are likely better than the median? (Would you, like more than 90% of the American population, consider yourself a better than average driver?)
3) Do you assign higher probabilities than chance to things outside of your control? (Or do you always take an umbrella if the weather forecast predicts 50% chance of rain?)

If, like most of us, you answered yes to at least one of the above, congratulations: you suffer from overconfidence.

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We Shall Overcome

The good news is that overconfidence is partially a result of our environment. When going up the company ladder, we are assigned more responsibility and authority to make decisions for our respective part of the firm. So it’s understandable that this added authority can sometimes be confused with what Harvard psychology professor Ellen Langer refers to as an “illusion of control,” the human tendency to anticipate control over circumstances which we in fact have little influence on – and it is this illusion which in turn leads many business professionals down a path of overconfident actions.

Humility, aided by a constant strive to learn can combat this illusion of control, and hence place a check on overconfidence. The “lifetime student” approach, employed by leaders who continuously seek out new courses and additional learning, increases the likelihood of these leaders recognising potential areas of overconfidence in their decision-making and seeking to correct them. A study that looked at some of these humble leaders quoted them saying things such as “I hope I’m not sounding like a big shot,” and “there are a lot of people in this company who could do my job better than I do.”

Top CEOs in business history exhibiting sensitivity to and overcoming overconfidence? Believe it.

Ready to do the same?

Natalie Baker

Natalie Baker is a blog editor for The Economist Careers Network.

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