The upside of irrationality – Overconfidence bias

“A very disturbing feature of overconfidence is that it often appears to be poorly associated with knowledge – that is, the more ignorant the individual, the more confident he or she might be.”

Robert Trivers, Sociobioligist

Duke University has been asking CFOs of large companies over a number of years to assess the return on Standard & Poor’s stock index over the coming year. Over time, the researchers collected 11,600 projections and thus had a good basis for assessing whether the CFOs were able to predict developments. Their conclusion was that CFOs of large companies have no idea about the development of the stock market a year ahead. In fact, the correlation between their estimates and price was in fact less than 0. This means that when they said, for example, that the shares would fall, the shares were more likely to rise. But the surprising thing was that CFOs were not aware that their forecasts were complete rubbish. This discrepancy between the CFOs self-perception and their real abilities is a good example of overconfidence.

Can overconfidence be a good thing? Well your tendency towards overconfidence damages your learning process and the quality of your decisions. Positive illusions and overconfidence lead to and escalate conflicts, reinforce arrogant and careless behavior, take undue credit for successes and blame others for failures, plan projects and set goals out of step with reality. Otherwise it is a great thing.

Here is a fun video with a very interesting hypothesis at the end about why you do all that:

Next up is Emotional bias – if you liked this, you will love that!

If you want to learn more about how to avoid this in your business, contact me at brian@behaviouralstrategygroup.com.

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