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Advantages of Confidence and Dangers of Overconfidence - Ideas for Leaders
Idea #118

Advantages of Confidence and Dangers of Overconfidence

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KEY CONCEPT

Confidence can be a useful quality for leaders to demonstrate when they wish to gain stature, credibility and influence. But what happens when a leader acts overconfidently? The past is overpopulated with overconfident leaders who have led their companies to disaster. Finding the balance between leveraging the benefits of acting confidently and avoiding the dangers of overconfidence is crucial. This Idea explores how to do so.


IDEA SUMMARY

Executives cannot afford to ignore the dangers posed by acting overconfidently. Numerous examples in recent history can attest to this, from the inflation of the dot-com bubble in the late 1990s, to the housing boom pre-2008. Fortunately, overconfidence is not a universal problem; it is only likely to be a problem in certain situations. Identifying these situations can considerably help executives, entrepreneurs, asset managers and investors avoid the pitfalls of overconfidence.

Essentially, overconfidence can been described in three ways: over-estimation (thinking that you are better than you actually are), over-placement (thinking that you are better than others when you are not), and over-precision (being too sure you know ‘the truth’).

Don Moore and Alex Van Zant of the Haas School of Business focus on the effects of overconfidence in the form of over-placement in an article published in California Management Review, suggesting it can have an impact on many types of business activities, such as investment decisions, corporate mergers and the introduction of new products.

The situations they identify as being most likely to give rise to over-placement include the following:

  • When a task is easier than we originally expected, we over-place. This is similar to when students learn that an exam will be open-book; their collective expectations of getting an A goes up, even if the class will be graded on a forced curve.
  • The extent to which we think we have control of a situation can also influence overconfidence.
  • When information is lacking or ambiguous, we over-place.

However, confidence in general is not all bad. Previous research has shown that there are many benefits to acting confidently. Confidence can motivate people to take on the risks necessary for achieving growth and prosperity. It can also improve social status and deter competition. But when confidence veers into overconfidence, that’s when it can backfire. When their confident claims are revealed to be false, witnesses, advisors, and leaders alike can all lose credibility. 


BUSINESS APPLICATION

In order to leverage the advantages of acting confidently without risking the dangers of overconfidence, leaders should work on analysing their private beliefs. What this means is to consciously consider the following:

  • Ask yourself if a task feels too easy. If it does, you may be at danger of failing to update your beliefs about the competition, resulting in over-placement.
  • Ask yourself if you are really in control. The weather, the actions of competitors, larger macroeconomic factors are all examples of forces beyond our control. Overestimating the amount of control you have over your own outcomes can lead you to enter competitive markets where success is largely dictated by random chance.
  • Finally, listen to humbling evidence. Don’t ignore any evidence that shows you are not ranking as favourably as you may have thought. This might not boost your ego, but it could save you from making more costly mistakes.

Strategically conveying confidence to others, in combination with the above, can help ensure executives to avoid unnecessarily subjecting their organizations to the pitfalls of overconfidence.


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Idea conceived

January 1, 2013

Idea posted

Apr 2013
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