Overconfidence: The Kryptonite for Leaders

In my 35 years of training, mentoring, and coaching leaders, I’ve found that overconfidence, a critical component of a lack of self-awareness, accounts for a significant percentage of leader failures.

Overconfidence produces detrimental if not disastrous, daily consequences in politics, business, and personal lives. Overconfident leaders are apparent in over-trading behaviour, managers’ poor forecasting, their tendency to introduce risky products, their tendency to engage in value-destroying mergers, domestic social and economic policies, and foreign affairs, including war.

What is Overconfidence?

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.”

People often point to another motivation for feeling confident: the belief that confidence contributes to success (a notion popularized by the 2006 book The Secret). For instance, in a 2008 article titled “Prescribed Optimism: Is It Right to Be Wrong About the Future?” David A. Armor, Cade Massey, and Aaron M. Sackett report that the overwhelming majority of their respondents endorsed feeling optimism, even excessive optimism because they thought that simply holding optimistic beliefs would make them come true

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, 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 asked readers: “Am I better than average in getting along with people,” and “Am I a better-than-average driver?”

Burton noted that if you are like the average person, you probably answered yes to both questions. Studies typically find that about 90 percent of respondents answer those questions positively. Ninety percent of the population cannot be better than average in getting along with others, and 90 percent cannot be better-than-average drivers.

While, by definition, only half the people can be better than average at getting along with people and only half can be better-than-average drivers, most people believe they are above average. The logical conclusion we can draw is that a high percentage of those self-described “above average” individuals are, in fact, below average in those areas. And they are blissfully unaware of their incompetence.

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 regarding leaders, overplacement and overprecision is 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.

Another way in which people can indicate their overconfidence about something is by providing a 90 per cent confidence interval around some estimate; when they do so, the truth often falls inside their confidence intervals less than 50 per cent of the time, suggesting they did not deserve to be 90 per cent confident of their accuracy. In his 2011 book Thinking Fast and Slow, Daniel Kahneman called overconfidence “the most significant of the cognitive biases.” In his New York Times article, he said: “Overconfident professionals sincerely believe they have expertise, act as experts and look like experts. You will have to struggle to remind yourself that they may be in the grip of an illusion.”

Overconfidence in an Organizational or Institutional Setting

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 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.”

Overconfidence can generate “positive illusions.” Research questions the generality of the beneficial association between positive illusions and mental health. Others claim that positive illusions are disadvantageous and even harmful when they lead to poor judgment, disengagement, the pursuit of unreasonable goals, and suboptimal negotiations. Overly optimistic beliefs can diminish the pleasure of outcomes.

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 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.”

Leader Overconfidence

Confidence has been heralded as one of the most highly-rated leadership attributes. But too much of it can be catastrophic, particularly regarding judgment and decision-making. Research has found that overconfident leaders can negatively impact organizational performance.

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.

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.

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 about 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 and fraud.”

Humphery-Jenner notes that in the global financial crisis of the late 2000s, there was 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 get the money,” he says. “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.

Joey T. Cheng, Elizabeth R. Tenney, Don A. Moore and Jennifer M. Logg in their article in Harvard Business Review entitled “Overconfidence is Contagious,” describe how after examining the Enron scandal and the overconfident and fraudulent behavior of their senior executives, they found “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 negotiate deals with questionable financials aggressively and take on increased risks under the illusion of invincibility.”

In the Enron case and several other cases the researchers studied, they concluded, “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.”

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 says, “Overconfidence is the natural result of privilege. If the future of leadership were more meritocratic, and managers selected leaders based on 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.”

Overconfident Political Leaders

Overconfidence has played a key role in some of the greatest blunders in modern history, including the sinking of the Titanic, the Vietnam War, the Chernobyl nuclear accident, and the 2008 financial crisis, not to mention governmental mismanagement of the COVID-19 pandemic.

Don A. Moore, professor of management at the University of California, Berkeley’s Haas School of Business, cites the example of an overconfident leader in Donald Trump: “If there was ever a powerful example of the triumph of confidence, it is the election of Donald Trump. Trump came to the presidency with a complete lack of government experience and grandly confident claims and promises.”

During his presidency during the COVID-19 crisis, as the number of confirmed cases of COVID-19 in the United States skyrocketed, Trump continued to express confidence, suggesting that the pandemic would abate soon and the U.S. economy would be “raring to go” by Easter.

Moore’s research shows that people routinely elevate leaders who express greater confidence than is warranted. He says, “The perverse consequence when it comes to leaders, though, is that by selecting the most confident, we are also very likely selecting the most overconfident.” He frequently references how Trump is delusional in many of his optimistic pronouncements.

In an article in Behavioral Science & Policy, Moore and Max H. Bazerman argue, “Yet when politicians’ displays of confidence are based not in competence but on an inflated sense of competence or are simply faked, they can have terrible consequences. They increase the likelihood that voters will elect candidates who underperform and cause harm. Over-confidence and pretences of confidence can impair planning for an uncertain future in a complicated world, where a leader cannot just wish away pandemics and other crises.”

Moore and Bazerman warn: “This dynamic can have unfortunate consequences for the public if political candidates, knowing that self-confidence attracts voters, begin a kind of “confidence arms race,” in which each person strives to express greater confidence than the other. The greater the escalation, the less informative candidates’ confidence signals become. If all candidates express maximal confidence, these expressions become worthless as a sign of competence and future performance, thus as a guide to accurately distinguishing among candidates. We repeat: Beware of leaders who talk themselves into false displays of confidence untethered to reality.”

Summing Up

Increasingly, the distance between expressions of confidence becoming overconfidence and hubris and narcissism is becoming more evident in life, a link that can have disastrous consequences. We must be vigilant and realistic and avoid being deceived by unrealistic optimism and overconfidence.

You may be interested in my book on the essential element of good leadership: Virtuous Leadership: The Character Secrets of Great Leaders, available with Amazon and Barnes and Noble.