How Overconfidence, Like a Virus, Can Spread and Create Havoc

Image: managers.org.uk

In my 30 plus years of training and coaching leaders, I’ve found the leaders that are overconfident, narcissistic, full of hubris, with an accompanying lack of self-awareness, account for a significant percentage of leader failures, and worse, inflicting damage to their organizations and people.

Overconfidence can be defined as “when someone has more confidence than they should have based on the situation and they misjudge their ability or opinion,” or “ confidence in their judgments and knowledge is higher than the accuracy of these judgments.”

You could argue that overconfidence of leaders is apparent in over-trading behaviour, managers’ poor forecasting, their tendency to introduce risky products, and their tendency to engage in value-destroying mergers.

Even in a presidential campaign filled with startling soundbites, this one stands out: “I could stand in the middle of Fifth Avenue and shoot somebody, and I wouldn’t lose any voters,” Donald Trump told a group of Iowa supporters.

A recent article in Politico described Trump as the “American Silvio Berlusconi,” the flamboyant and controversial former Italian prime minister who once referred to himself publicly as “the best political leader in Europe and in the world.”

More recent (but clearly in the same spirit) was the eye-opening comment made by infamous “pharma bro” Martin Shkreli, best known for raising the price of a drug prescribed to newborn babies and AIDS patients from $13.50 per pill to $750. After a hostile Congressional hearing, he took to an online chat room to boast, “You cannot troll the greatest troll who ever lived.”

Whether you call it guts or hubris, men like Trump, Berlusconi, and Shkreli certainly do not suffer from a lack of confidence. In fact, their striking and sustained overconfidence is the sort of thing that has puzzled research psychologists for decades.

The Dunning–Kruger effect is the cognitive bias whereby people with low ability at a task overestimate their ability. The Dunning–Kruger effect is usually measured by comparing self-assessment with objective performance. For example, the participants in a study may be asked to complete a quiz and then estimate how well they did.

This subjective assessment is then compared to how well they actually did. This can happen either in relative or in absolute terms, i.e., in comparison to one’s peer group as the percentage of peers outperformed or in comparison to objective standards as the number of questions answered correctly. The Dunning–Kruger effect appears in both cases but is more pronounced in relative terms: the bottom quartile of performers tend to see themselves as being part of the top two quartiles. The initial study was done by David Dunning and Justin Kruger. It focuses on logical reasoning, grammar, and social skills. Since then, various other studies have been conducted across a wide range of tasks. These include skills from fields such as business, politics, medicine, driving, aviation, spatial memory, exams in school, and literacy.

The Dunning–Kruger effect is usually explained in terms of meta-cognitive abilities. This approach is based on the idea that poor performers have not yet acquired the ability to distinguish between good and bad performances. They tend to overrate themselves because they do not see the qualitative difference between their performances and the performances of others. This has also been termed the “dual-burden account” since the lack of skill is paired with the ignorance of this lack. Some researchers include the meta-cognitive component as part of the definition of the Dunning–Kruger effect and not just as an explanation distinct from it.

Many debates surrounding the Dunning–Kruger effect and criticisms of it focus on the meta-cognitive explanation but accept the empirical findings themselves otherwise. This is often done by providing alternative explanations that promise a better account of the observed tendencies. The most prominent among them is the statistical explanation, which holds that the Dunning–Kruger effect is mainly a statistical artifact due to the regression toward the mean combined with another cognitive bias known as the better-than-average effect. Other theorists hold that the way low and high performers are distributed makes it more difficult for low performers to assess their skill level, thereby explaining their erroneous self-assessments independent of their meta-cognitive abilities. Another account sees the lack of incentives to give accurate self-assessments as the source of error.

The Dunning–Kruger effect is relevant for various practical matters. It can lead people to make bad decisions, such as choosing a career for which they are unfit or engaging in behavior dangerous for themselves or others due to being unaware of lacking the necessary skills. It may also inhibit the affected from addressing their shortcomings to improve themselves. In some cases, the associated overconfidence may have positive side effects, like increasing motivation and energy.

Overconfidence is a psychological bias. For example, according to Ola Svenson’s study 93 percent of American drivers claim to be better than the median, which is statistically impossible. Similarly, a study by psychologists Patrick R. Heck and colleagues published a study in PLOS ONE which showed that 65% of Americans believe they are above average in intelligence. The researchers reported that “Because we classified “Don’t Know” responses as not agreeing, 65% represents a conservative estimate of the proportion of people who place themselves above average. Considering only people who expressed an opinion (i.e., excluding all “Don’t Know” responses), nearly three times as many people agreed (65%) as disagreed (23%) that they are above average in intelligence.”

In his book Investment Titans, Jonathan Burton invited readers to ask themselves the following questions: “Am I better than average in getting along with people,” and “am I a better-than-average driver?”

Burton reported that the average person answered yes to both questions. In fact, studies typically find that about 90 percent of respondents answer positively to those types of questions. Obviously, 90 percent of the population cannot be better than average in getting along with others, and 90 percent of the population cannot be better-than-average drivers.

Don A. Moore and Paul J. Healy published a study in Psychological Review, in which they describe three kinds of overconfidence:

  • “overestimation” of one’s actual performance;
  • “overplacement” of one’s performance relative to others; and
  • “overprecision” in expressing unwarranted certainty in the accuracy of one’s beliefs.

The most significant relationship of these three kinds of overconfidence when it comes to leaders, overplacement and overprecision appears to be the most relevant.

Strikes, lawsuits, and wars could arise from overplacement. If nations were prone to believe that their militaries were stronger than were those of other nations, that could explain their willingness to go to war.

The theory doesn’t negate the possibility that there are also cultural effects relevant to overestimation. For example, researchers write, in the US, the most individualistic society in the world, unusually high levels of overconfidence might be triggered by cultural cues that emphasise success and self-sufficiency — and as those cultural values spread between people, so too can over-confidence.

However, the work still suggests that overconfident beliefs among a few may lead to a cascade-like spread of biased beliefs through a social group, team, or society. A recognition that this happens, will surely be important for all kinds of organisations.

Overconfidence can delude us into dangerous thought or actions — and that same arrogance can also spread to others like wildfire, too.

In the late 1980s, the aptly named psychologist James Reason wanted to understand the flawed thinking behind road accidents. He took to the streets and supermarket car parks around Manchester, UK, and asked a total of 520 drivers to estimate the number of times they’d committed certain offences. Did they regularly fail to check their rear-view mirror, for instance? Or had they entered the wrong lane when approaching a junction? Beside the list of errors and violations, the participants were also asked to estimate how their driving ability compared to others’ — whether it was better or worse than average.

Given the sheer amount of time many people spend behind the wheel, you’d hope that most of the drivers would have at least some awareness of their own abilities. Yet Reason found that this couldn’t have been further from the truth. Of the 520 drivers, just five considered that they were worse than average — fewer than 1%. The rest — even the truly abysmal drivers who were constantly making errors — considered themselves to be at least as good as the next person, and many thought they were a lot better. It was, essentially, a mass delusion that rendered them completely blind to their own failings.

Three decades later, psychologists have documented similarly deluded levels of confidence for many different traits and abilities. We tend to think we are more intelligent, creative, athletic, dependable, considerate, honest and friendly than most people (a phenomenon that is often known as the “better-than-average effect”). “The evidence is extremely — even unusually — strong,” says Ethan Zell, an associate professor of psychology at the University of North Carolina at Greensboro, who recently conducted a meta-analysis of the studies so far. The strength of the effect has made it a classroom favourite, he says. “It basically never fails. If you give people a questionnaire where they rate themselves relative to the average, almost everyone in the class thinks they’re above average at almost everything.”

The consequences may be serious. As Professor Reason had implied, overconfidence of our own skills on the road may lead to risky driving and serious accidents. In medicine, it can lead to fatal diagnostic error; in law, it can lead to false accusations and miscarriages of justice. And in business, managerial arrogance puts companies at a greater chance of both committing fraud and declaring bankruptcy.

We are often incentivized to be overconfident. In Thinking, Fast and Slow, economist Daniel Kahneman gives an account of the social pressure on doctors to act as if they understand everything: “Generally, it is considered a weakness and a sign of vulnerability for clinicians to appear unsure. Confidence is valued over uncertainty and there is a prevailing censure against disclosing uncertainty to patients. An unbiased appreciation of uncertainty is a cornerstone of rationality — but that is not what people and organizations want. Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution.” It’s little wonder, then, that overconfidence is often known as the “mother of all biases”; Kahneman famously remarked that if he had a magic wand that could change one thing about human psychology, he would eliminate our superiority complex.

Malcolm Gladwell, in his article,Banks, Battles and the Psychology of Overconfidence” in The New Yorker, said Since the beginning of the financial crisis, there have been two principal explanations for why so many banks made such disastrous decisions. The first is structural. Regulators did not regulate. Institutions failed to function as they should. Rules and guidelines were either inadequate or ignored. The second explanation is that Wall Street was incompetent, that the traders and investors didn’t know enough, that they made extravagant bets without understanding the consequences. But the first wave of post-mortems on the crash suggests a third possibility: that the roots of Wall Street’s crisis were not structural or cognitive so much as they were psychological.”

Across four studies, a team of Georgia-based psychological scientists Lee A. Macenczak, Stacy Campbell, Amy B. Henley, and W. Keith Campbell found a relationship between narcissism and overconfidence: Higher narcissism went hand-in-hand with overconfidence. When highly narcissistic people were primed with feelings of power, they became even more overconfident in their abilities.

“Narcissists are especially prone to errors of overconfidence because they possess the following qualities: they think they are special and unique, that they are entitled to more positive outcomes in life than are others, and that they are more intelligent and physically attractive than they are in reality,” Macenczak and colleagues explain in the journal Personality and Individual Differences.

Grandiose narcissism is characterized by an inflated sense of self-importance and entitlement, feelings of superiority over others, and a readiness to exploit others. People with these characteristics tend to make their way up the hierarchy within organizations, often ending up in positions of power.

Our obsession with money and susceptibility to charisma, over-confidence and surface gloss have propelled us into an age where sham, spin, doubletalk and scams have become the new norms.

Tomas Chamorro-Premuzic, argues both in his book Why Do So Many Incompetent Men Become Leaders?: (And How to Fix It) and his Harvard Business Review article “How to Spot an Incompetent Leader”, contends, “To start, those responsible for judging leadership candidates need to improve their ability to distinguish between confidence and competence. The one main advantage men have over women when it comes to being picked for these roles is our human tendency to equate hubris and arrogance to talent. Although it is true that all of us are generally overconfident, men tend to be more overconfident (and arrogant) than women.”

He goes on to say, “Overconfidence is the natural result of privilege. If the future of leadership were more meritocratic, and managers selected leaders on the basis of their talent and potential rather than Machiavellian self-promotion, reckless risk taking, or narcissistic delusions, we would not just end up with more women leaders, but also with better leaders.

Many competent men are also overlooked for leadership roles because they don’t match our flawed leadership archetypes — meaning, they are perceived as ‘not masculine enough,’ or fail to display the very attributes that make leaders less effective.”

Tomas Chamorro-Premuzic points out that although men make up a majority of leaders, they underperform when compared with female leaders. In fact, most organizations equate leadership potential with a handful of destructive personality traits, liken overconfidence and narcissism. In other words, these traits may help someone get selected for a leadership role, but they backfire once the person has the job.

Research shows, he argues, that men are more likely to be overconfident narcissists, and psychopathic than women. These traits help them to achieve a leadership role, and then hurts their performance when in it. When competent women — and men who don’t fit the stereotype — are unfairly overlooked, we all suffer the consequences, Chamorro-Premuzic says, “ The result is a deeply flawed system that rewards arrogance rather than humility, and loudness rather than wisdom. Instead of promoting people on the basis of their charisma, overconfidence, and narcissism, he says, we must put in charge people with actual competence, humility, and integrity.”

“Traits like overconfidence and self-absorption should be seen as red flags,” he writes. “But instead they prompt us to say, ‘Ah, there’s a charismatic fellow!’”

He writes, “People tend to equate leadership with the very behaviours — overconfidence for example — that often signal bad leadership.” He points out that the world’s leadership success rate is woeful. He cites a 2011 Global Study: “More than 14,000 human resources professionals and other managers rated barely 26 per cent of their current leaders positively.”

Researchers A. Peter McGraw, Barbara A. Mellers and Ilan Ritov published a study “The Affective Costs of Overconfidence,” in the Journal of Behavioral Decision-Making, and concluded: “Most people view themselves through rose-colored glasses. They believe their future holds more favorable outcomes and fewer unfavorable outcomes than those of their peers. They believe they are superior to others on most socially desirable dimensions. They believe they can influence and even control situations governed largely by chance, and they believe their successes and failures are due to skill and bad luck, respectively.”

Using 10 years of quarterly CFO surveys conducted at Duke, Itzhak Ben-David, associate professor of finance at Ohio State, and professors John R. Graham and Campbell R. Harvey of Duke looked at more than 13,300 forecasts of the S&P 500 made by finance professionals, which was published in the Quarterly Journal of Economics.

They found the range of possible outcomes that CFOs provide for where the stock market will be in one year to be unrealistically narrow. “These executives are too sure of their ability to predict the future,” Ben-David said. “And we found this overconfidence was linked to decision-making at their firms, so there is a real-world impact.”

Confidence has been heralded as one of the most highly rated leadership attributes. But too much of it can be catastrophic, particularly when it comes to judgment and decision-making. Research has found that overconfident leaders can have a negative impact on organizational performance, leading to everything from introducing dangerous or faulty products to poor decisions about mergers and acquisitions.

Despite the research overconfident people attain higher social status and are viewed as more competent, allowing them to reap the reputational and financial benefits. “Confidence makes individuals appear more competent in the eyes of others, even when that confidence is unjustified and unwarranted,” says Cameron Anderson from the Haas School of Management at the University of California, Berkeley in his article in the Journal of Personality and Social Psychology. “Our studies found that overconfidence helped people attain social status. People who believed they were better than others, even when they weren’t, were given a higher place in the social ladder. And the motive to attain higher social status thus spurred overconfidence,” says Anderson.

In an international study — “Executive Overconfidence and Securities Class Actions — UNSW Business School senior lecturer Mark Humphery-Jenner , along with Suman Banerjee, Vikram Nanda and Mandy Tham, analyzed how CEO overconfidence can have an impact on the likelihood of a securities class action (SCA) being taken against a company.

“During our research, executive overconfidence was routinely remarked on as being an issue of concern in relation to financial misconduct and poor financial performance,” Humphery-Jenner says. “That appears to date back to corporate scandals such as Enron [in 2001] which were, at least in part, attributed to overconfidence in addition to fraud.”

Humphery-Jenner notes that more recently, in the global financial crisis of the late 2000s, there was also arrogance about the types of assets in which companies invested, leading to poor corporate performance. “Certainly when companies are failing there’s increased risk of litigation — the real issue is that to get litigation going you would have to be able to show some form of misconduct that warrants litigation and you would want the companies to have enough financing so that if you sued you could actually get the money,” he says.

The study concluded “Firms that are sued often suffer in the product market and have worse access to capital. Given the large potential cost of SCAs, it follows that executives will tend to risk SCAs only if they believe the benefits to be large or believe that their actions are unlikely to be detected and punished.” “Results of the research show that overconfident CEOs’ firms are about 25% more likely to be subject to a securities class action than are other firms.Mark Humphrey-Jenner argues.

Overconfidence and the Brain

Why are some leaders so overconfident, and why is it so prevalent? According to psychologist and author, Maria Konnikova, author of The Confidence Game: Why We Fall for It…Every Time, writing in the New York Times, “Human beings don’t like to exist in a state of uncertainty and ambiguity…. Confident people give off an air of assurance and certitude and are perceived as being competent which makes us an easy target to influence.”

The link between overconfidence and poor decision making is under the spotlight in an international study by scientists from Monash University and the Max Planck Institute for Human Cognitive and Brain Sciences in Leipzig.

The team has published a study in the journal Social,Cognitive and Affective Neuroscience which provides some insight into how overconfidence can lead to poor decision making. The authors include an international group of scientists at the Department of Social Neuroscience at the Max Planck Institute headed by Professor Tania Singer in collaboration with Dr Pascal Molenberghs from the Monash Institute of Cognitive and Clinical Neurosciences and Fynn-Mathis Trautwein, Anne Böckler and Philipp Kanske from the Max Planck institute team.

They analyzed data from the ReSource Project, which is a unique, large scale study on Eastern and Western methods of mental training performed at the Max Planck Institute. In the context of a social cognition task performed in the brain scanner, the volunteers watched a video of a person telling a story and then had to answer a difficult question about what the person said.

Subsequently, people indicated how confident they felt their response was correct. The researchers then measured how good people were in evaluating their own accuracy; a process called metacognition.

“The more confident people were about their performance, the higher the activation in brain areas such as the striatum, an area often associated with reward processing,” first author Dr. Molenberghs said. However, too much confidence was associated with lower metacognitive ability,co-first author Trautwein added.

When combined, the results indicate that although being confident entails a reward-like component, it can lead to overconfidence which in turn can undermine decision making.

Research shows that people in general are overconfident, but entrepreneurs appear to be particularly prone to arrogance. About half of new companies fail within five years, according to the US Bureau of Labor Statistics. Despite the imposing failure rate for new businesses, entrepreneurs are often quite confident that their ventures are going to succeed. One survey of 3,000 entrepreneurs found that 81% believed that their chance of success was 70% or higher; and a whopping 33% estimated their chance of success to be 100%.

Research from psychological scientists Daylian Cain, Don A. Moore, and Uriel Haran published in Strategic Management Journal, suggests that entrepreneurs may be the victims of their own better-than-average beliefs.

Across three experiments, the researchers showed that the better a person believes they are relative to others on a task, the higher the likelihood that they will decide to compete on that task. This overconfidence leads to larger numbers of competitors in “easy” markets, which could provide one reason why so many entrepreneurs make the mistake of confidently entering markets that are already overflowing with competition. “Naturally, if people believe their chance of success is higher than that of the competition, it will increase their willingness to enter contests or start new businesses, even when their objective chances of succeeding are not particularly good,” the researchers explain.

A new paper published in the Journal of Experimental Psychology, which reveals a route by which a bias towards overconfidence can develop. In their paper, Joey T. Cheng and colleagues provide evidence for the idea that if we’re exposed to people who are overconfident, this rubs off on us. In other words, we calibrate our self-assessments based on the confidence level of those around us. Overconfidence can, then, be transmitted socially — and this could help to explain how groups, teams and organisations form their own, sometimes drastically different, confidence norms.

They cite the example of when the Enron scandal broke in 2001, it shook Wall Street to its core and left thousands of people, who had lost billions of dollars in pensions and stocks, disillusioned and angry. People still wonder how the once-revered Wall Street giant, at the time the seventh-largest company in the U.S., crumbled almost overnight.

So what did go wrong? The search for answers leads consistently to Enron’s top executives, Jeffrey Skilling and Kenneth Lay, whose massive acts of accounting fraud, corruption, and deception covered up the company’s weaknesses until their exposure led to its downfall.

But a deeper analysis reveals the dysfunctional corporate culture that made it all possible. A “culture of arrogance” permeated the organization, and many employees felt like they were part of an elite group and believed they were smarter than everybody else. This culture of bravado drove employees to aggressively negotiate deals with questionable financials and take on increased risks under the illusion of invincibility.

How does such hubris become so entrenched within a company? And, more broadly, how do cultures of overconfidence emerge and become infused in any organization?

The researchers recently conducted research to help answer these questions, and our findings reveal that social contagion may play a crucial yet hidden role.

The authors state: “It comes as no surprise that teams and organizations possess distinct cultures and exhibit firm-specific values and norms, some of which are products of personnel selection and reward systems. For example, a company may offer large financial or prestige incentives to employees who flaunt competitive or risk-taking behavior, thereby fueling and rewarding feelings of invincibility. But another equally important (and less-obvious) force at play is the firm’s social environment — in other words, who’s around? Humans are exceptionally social creatures. We rely on learning from others, from language and religious rituals to food preferences and moral values. When we enter a social environment where overconfidence is rampant, we too may acquire an overconfident mindset.”

Chen says “In our research, we found that people are more likely to become overconfident when others around them express overconfidence. We call this the transmission of overconfidence, or the tendency to more closely align one’s self-assessments to the confidence level of others. If people can “catch” overconfidence from others, this effect may scale up within a company and generate widespread norms,” and goes on to say “We found evidence of overconfidence transmission across six studies. To measure overconfidence, we compared participants’ beliefs about their relative performance to their actual relative performance. The more people’s beliefs exceeded reality, the more overconfident we could say they were. We found evidence of overconfidence transmission in many different settings, ranging from in-person interactions to mere exposure to information about how others think. As such, our findings suggest that people may be most prone to “catching” overconfidence from their direct supervisors and teammates.”

An abundance of research reveals that overconfident leaders put their firms at risk. But, Chen says, “as our studies show, the havoc they can wreak extends beyond their own reckless decision making — they may be the first domino to fall, influencing their employees who in turn influence their peers. Inspiring a culture of overconfidence in this way fuels greater peril. One lesson from the story of Enron is that the success of an organization depends on cultivating the right social climate and norms — norms that promote grounding in reality and freedom from delusions of grandeur.”

Cheng’s results fit with many other studies of conformity, including memories of a shared event, our perceptions of beauty and our political opinions. “Just by being exposed to someone, you are more likely to acquire their ways of behaving and their ways of thinking,” Cheng says.

It’s easy to imagine how that could occur in a workplace, Cheng adds. “Let’s say you are a financial banker. You are pretty calibrated when you first entered the business, but as you get more engrossed in that environment, you see that some people tend to make boastful statements, and they have this amazingly confident appearance in how they talk and how they communicate non verbally. And you, in turn, could become a bit of a clone of that person.”

Summary:

While confidence is an important leader attribute that can contribute to an organization’s, or even country’s success, the research clearly shows that overconfidence, particularly when coupled with narcissistic personalities, can be a detriment, which can lead to disasters. Those responsible for hiring and promoting leaders to pivotal and senior positions in particular, should be wary of candidates that how excessive confidence and arrogance.

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Ray Williams

Author/Retired Executive Coach-Helping People Live Better Lives and Serve Others