Three Ways Overconfidence Can Make a Fool of You

January 08, 2013


In the film Trouble With the Curve, Clint Eastwood plays a long-time baseball scout for the Atlanta Braves who discovers a high-school hitting sensation. He comes up against a young fellow scout who uses statistics to assess players and doesn’t bother with watching them play. The young scout openly challenges Eastwood’s relevance.

Eastwood visits the potential draft pick. Because of his failing sight, Eastwood listens to the sound of the ball hitting the bat and has his daughter watch how the player grips the bat and how his hands move during a hit. Eastwood’s conclusion is that while the player can hit fastballs, he can’t hit curves. He recommends passing on the kid.

The younger scout, however, demands that the Braves select the youth, based on the data. He wins the battle, and the Braves use the team’s first-round draft to pick the player. You can guess how the story goes from there: It turns out Eastwood was right, and the hitting prodigy unravels when a talented pitcher varies his throws.

Trouble with the Curve highlights the problem of overconfidence in decision making, which comes from believing you have more accurate and complete information than you actually do.

In the summer of 2012 investors flocked to buy during the initial public offering for Facebook. A week later, analysts downgraded the company after additional assessment of its revenue models. Its stock price dropped and has yet to recover. Like the hitter in Trouble with the Curve, the company had shortcomings that needed correcting before it could be a true first-round pick.

Executives all make big decisions, about hiring, company valuations, product launches, investments, strategic direction, building new facilities, mergers, acquisitions, changing technology, new approaches to doing business, and more. Psychologists tell us that the following weaknesses commonly harm our decision making:

Overestimating our accuracy and depth of knowledge about a situation. Dozens of studies of lawyers, doctors, nurses, managers, entrepreneurs, investment bankers, and others have found that they tend to put great trust in their opinions and overestimate their expertise. A recent study of anesthesiologists found that one of the most frequent cognitive errors was premature closure of the initial diagnosis. Once the physician made a diagnosis, she or he did not revisit it. This led to errors. In making critical decisions, you should always question your assumptions, biases, and knowledge. Everyone perceives a situation differently, and your interpretation can be wrong. Seek out a diversity of perspectives, find opinions different from your own, collect additional information, and use that information systematically. As Mark Twain noted, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Ignoring or not seeking disconfirming information. The same study of physicians found that a second common bias was the failure to pay attention to or actively seek information to the challenge the initial diagnosis. People tend to overuse information and data that support their current beliefs. Additionally, people often fail to critically question what is really happening. People who make important decisions must develop the practice of actively seeking out information that might contradict their conclusions and acting on it. In an interview with the Urban Land Institute, John Bucksbaum, former chairman and chief executive of General Growth Properties, talked about how at its peak GGP owned more than 200 regional malls and its stock traded at $67.50 a share. However in 2008 the company carried a heavy debt load, with 22% of it due for repayment. With the crash of the commercial mortgage-backed securities market, it had no way to refinance its debt. Its stock fell dramatically, and the company filed for bankruptcy. Bucksbaum noted that he passed up many opportunities to raise money by selling equity, but he succumbed to the overconfidence of others, allowing them to talk him out of it. Decision makers must always, he says, use critical thinking to question major decisions. They must not let overconfidence get in the way of evaluating decisions thoroughly.

Over assurance from past success. In 2012 Kodak filed for bankruptcy. John Kotter, professor emeritus at Harvard Business School, recently noted that Kodak’s failure resulted from complacency bred by its own success. The company had stopped innovating and stopped creating urgency around changes in its marketplace, and, perhaps as damaging, its executives had stopped listening to employees who saw the problems coming. Overconfidence created by success leads to poor decisions. Companies need to celebrate successes but also avoid letting those successes breed complacency and blind them to important change.

The young scout in Trouble with the Curve gets fired because of his overconfidence. The astronaut Neil Armstrong, on the other hand, had a possibly lifesaving aversion to the weakness. He once said, “Well, I think we tried very hard not to be overconfident, because when you get overconfident, that’s when something snaps up and bites you.”