Overconfidence in personal decision making

The people who become decision makers in an organisation have experienced a lot of previous successful decisions and feats. There is a good reason for why they have become confident and being confident is a strong survival trait for a manager or a director. It is extremely difficult to point out when an individual or a group of people crosses the line and becomes overconfident, probably we can only tell it retrospectively.

And, the really interesting thing is that sometimes decisions that are rooted in overconfidence can lead to successes: the struggle to overcome the challenge might open up opportunities for new thinking, people or personal and organisational skills. Overconfident people have the gift to take an organisation to new highs, explore beyond its boundaries although can also lead to serious trouble (i.e.: the case study of Quaker in Certo, Connelly, Tihanyi, 2008).

Another interesting effect of overconfidence, especially when the decision maker seems highly and overly confident, is that this behaviour attracts many ambitious people – which again may turn an  initially overconfident decision into a successful one.

No wonder managers and entrepreneurs are overconfident – people with low confidence will not start a business or have a significantly lower chance to become managers or decision makers in an organisation (Certo, Connelly, Tihanyi, 2008).

I find the concept of metaknowledge very interesting and thought-provoking. We all use it to some extent and actively consider the depth and width of our knowledge and similarly our ignorance of a topic (Russo and Shoemaker, 1992) but being conscious about it is deliberating for me. I think there is an important link between metaknowledge and overconfidence: experienced managers understand metaknowledge, however acknowledging their limitations openly might be outside their comfort zone either for personal psychological reasons, for professional considerations or political agendas. They will act overconfident to avoid a situation they are concerned about.

In one of my previous workplaces as assistant general manager I had a difficult time dealing with a business unit manager, who was über-confident – a real loose cannon, who we finally had to restrain from making decision above a specific business value.

The base for his overconfidence was both the availability and the confirmation bias. His world view was in some way very simplistic and in the split second of finding available information supporting one of his ideas, he would make the decision. As an operations person, he had to make a huge amount of minor decisions and this bias actually made him a super effective person (he also had a lot of other highly valued qualities both professionally and as an individual). However, he applied the same mental processes to all the problems he encountered and I had to team up with other managers and thoroughly prepare for meetings involving him to make sure we are able to counter his availability bias with enough alternative scenarios to ponder.

His confirmation bias was an interesting case study for me in understanding how not to make decisions on complex business development issues. True, one needs to make bold moves in the development area, but in a highly saturated and competitive market it is difficult to come up with something new that will actually work. However, when this manager found one piece of supporting data or information for his pet idea, he would have started that business on the spot. This resulted in huge amounts of failed business attempts and inventories of products the company was hardly associated with rotting away in the corner of the warehouse.

The solution we came up to handle these issues was to always have two sessions on any business development idea, so everyone had time to research the case and to allow him to think about alternatives and contradictory information. Looking back, I think this was our effort to activate System 2 thinking and deploy metaknowledge.

Sources:

S. Trevis Certo, Brian L. Connelly, Laszlo Tihanyi (2008), Managers and their not-so rational decisions. Business Horizons (2008) 51, 113–119.

J. Edward Russo and Paul J. H. Shoemaker (1992), Managing overconfidence. Sloan Management Review, 1992, Winter 1992, Volume 33, Number 2, 7-17.