As a matter of
necessity, managers must rely on the ability and skills of
subordinates to accomplish the outputs of their position. When
specific information on a subordinate’s ability to accomplish a
task is lacking, managers often make decisions based on the
subordinate’s level of confidence. If a subordinate feels that
the task is achievable with a high degree of success, then the
manager often relies on this confidence and gives permission to
move forward.
Given such a situation, overconfidence on the part of the
subordinate can result in negative consequences for the manager,
subordinate and the firm in general. In basing a decision on a
subordinate’s confidence in success, a manager puts him or
herself in a negative position if the subordinate was
overconfident. Managers must be focused on minimizing the risks
associated with overconfidence and to do so need to distinguish
between a subordinate’s confidence and overconfidence. This is a
difficult task and is complicated by three somewhat
contradictory factors:
1. Successful individuals tend to be confident individuals;
2. Research indicates individuals tend to be overconfident;
3. Overconfidence is considered by many to be a decision trap or
mistake.
The first point identifies successful managers as tending to be
confident and it is important to note that this is not the
opposite of overconfident, but the midpoint. While it is common
to associate confidence with accurate judgment, the degree (or
calibration) to which a successful individual’s confidence in a
decision matches reality may be very inaccurate. An individual
can be confident and still be completely wrong. Indeed,
overconfidence and under confidence are commonly used after the
results of the decision are known and as such measure
calibration. One cannot be overconfident or under confident
unless it is possible to compare their confidence level with
actual results. In this sense, a confident individual is at the
midpoint of the confidence scale.
If we define “confident” individuals as those who display
self-esteem and conviction, such a label could refer less to
faulty decision making and overconfidence and more to the type
of forceful personality that is useful in succeeding as in the
workforce. Managers face the challenge of distinguishing between
such confident, successful individuals that are an asset to the
firm and the overconfident, foolhardy individuals that are a
detriment to the firm.
The first step managers can take to minimize this risk is to
regularly monitor subordinate’s accuracy in confidence levels in
accomplishing tasks. By asking subordinate’s to assess the
likelihood of success given agreed upon factors, managers can,
over time, develop a track record for each subordinate that
shows whether the individual is habitually overconfident in his
or her abilities. Through such a process, managers can mitigate
the risk of having to rely solely on a subordinate’s confidence
level in a situation where other relevant information is not
available. The data gathered over time allows the manager to
assess the typical accuracy of the subordinate in such
situations and adjust decisions accordingly.
Though such a monitoring process has obvious benefits, managers
often face a decision where a subordinate’s previous degree of
accuracy in predicting success is not relevant or where the risk
level is too high to rely on what the subordinate’s sense of
what “usually happens”.
Indeed, the risks associated with failing to differentiate
between a subordinate’s confidence and overconfidence can vary
tremendously within different industries. A recent paper
references the fact that “overconfidence increased with
incentives to perform well.” I believe it is reasonable to
therefore say that jobs where incentives to perform well are the
primary means of compensation would likely have more
overconfident individuals. Salespeople may therefore be prone to
being overconfident in their ability to sell products or to
achieve sales targets. As a salesperson, overconfidence is a
very valuable and helpful trait, in that believing that you
understand the product even if you don’t or believing that you
can convince clients to purchase from you would be very useful
in such a job. In such a position, the risk of overconfidence
may be quite low in most situations.
The second step that managers can take to minimize the risk of
overconfidence is to adjust compensation strategies where
necessary. Where the personal benefit of success is high,
subordinates are more likely to assess their chance of success
as high, as they are deeply motivated to achieve the success.
This poses a real problem for the manager, who is looking to
base his or her decision not on the subordinate’s desire to be
successful, but the likelihood of success. The manager can
choose to improve the calibration of the success rate by
removing direct compensation for this particular decision. A
salesperson who no longer will receive direct compensation as a
result of success in the endeavour is unlikely to adjust
expectations of success higher and the manager will receive a
more realistic estimate of success.
The consequences of overconfidence are highest in industries or
positions that would see the most harm from such miscalibration.
A firefighter misjudging his ability to withstand high
temperatures could die from such overconfidence if he remained
inside a fire too long. Overconfidence can have strict
consequences for other individuals, as in the case of an analyst
who bases recommendations on suspect logic. Previous accuracy in
predictions in a particular industry can lead the analyst to
become overconfident in his or her ability to assess the value
of a firm in that industry. There are numerous situations where
overconfidence can lead to disaster and in jobs where such
errors in judgment carry high consequences, overconfidence is
extremely dangerous.
The third step that managers can take to minimize the risk of
overconfidence is to consider what forces or factors could be
influencing the subordinate’s assessment of the chance of
success. Such a review can take place with the participation of
the subordinate, where the focus is placed not on the assessment
but on how the assessment was reached. A thorough review would
focus both on areas where the individual may be overconfident as
well as areas where they have underestimated the chance of
success. Through considering reasons why the individual might be
inaccurate in his or her assessment, calibration can be greatly
increased.
With overconfidence playing a significant role in the failure of
initiatives and projects within a firm, managers must develop a
process to reduce the risks associated with overconfidence.
Through the use of a process of tracking past predictions of
success, the adjustment of compensation structures to improve
accuracy and regular reviews of internal and external sources of
miscalibration, a manager can accomplish the goal of reducing
the risk of overconfidence. |
