Overconfidence pays

Do organizations systematically select top bosses for their irrationality? This is the question posed in a new paper by Cameron Anderson and Sebastien Brion at the University of California Berkeley. They say:

In conditions where there is any ambiguity in competence and performance (which is common in organizations), overconfident individuals will be perceived as more competent by others, and should attain higher levels of status, compared to individuals with more accurate self-perceptions of competence.

This is because overconfident people send out more “competence cues”; they talk louder, have more confidence in their opinions, use more emphatic gestures, and all this is wrongly interpreted as signs of actual ability.
They established this experimentally. 104 students were asked to judge strangers’ personalities from their photos. They were then asked to estimate how they performed. The difference between these estimates and actual performance was used to measure over-confidence. The subjects were then paired together randomly on a similar task, after which subjects were asked to rate their partners’ ability. Overconfident individuals were indeed perceived as more competent  than they really were.
The effect is significant. Each three percentage points of overconfidence lead to someone being perceived as one percentage point more able than they really were. So, for example, if an individual of median ability were to consider himself better than 80% of subjects, his partner would rank him better than 60%.
If a similar thing happens in organizations, then overconfident people are more likely to be promoted. And this could have positive feedback effects. Higher status will itself breed even more overconfidence (“I got the job so I must be good”). And if bosses employ like-minded subordinates, the result could be entire layers of management which are both over-confident and engaged in groupthink. The result will be that the organization takes excessive risks.
Does this sound like any (ex-)bank you might have heard of?
Now, you might object here that, over time, the overconfident, over-promoted individual will reveal his mediocre ability and so be stopped from getting the top job.
Not necessarily. One problem here is tail risk. Imagine two projects. One pays a certain 3% a year. The other has a 98% chance of paying 5% and a 2% chance of losing 100%. A rational risk-neutral individual would choose  the safe prospect, because the risky prospect has a lower expected pay-off. However, the overconfident individual would under-rate the chance of loss and so choose the risky venture.
And here’s the thing. Over 10 years, this individual has a four-fifths chance of being “right” every year, and even over a 20-year period he has a two-thirds chance of being "right" every year. Over such a period, the overconfident boss’s reputation would grow - exacerbated, perhaps, by his employers and investors’ confirmation bias. And so he’d get a superstar salary.
As the book of Ecclesiastes has it (9:11):

The race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.

It omitted to had, however, that chance happeneth to be biased. 

Comments

[Tom Addison]

A manager at where I work once (unknowingly) implied something similar. Her view was that new starters who exhibit a high level of confidence will be deemed to be better than another individual who achieves exactly the same results whilst exhibiting less confidence along the way.

So basically act like you know what you're on about when really you don't have a bloody clue.

[Harriet]

This explains a lot about the adage about women (who typically give off lower signals of confidence than men) having to do twice as well as men to be thought half as good.

[rogerh]

In a real company sticking with the certain 3% payback will lead at best to a takeover. Essential to take on the risky jobs now and then - it sharpens everyone up and makes the company shine - and attract more investment. Only an economist would believe the true payback matrix is 98/5/2 - in the real world the boss can kick ass, inspire people, hire in specialists, cheat and lie. Only dullards want to work for a plodding boss and inspirational bosses pay better - but you have to keep an eye on them and jump ship when you see the mask slip.

[Terrapin]

I've always worried about people who "know" they are right - whether in the workplace or the wider world. Not surprising there are so many examples of people who either don't evaluate outcomes, or, worse still, convince themselves that a result which was clearly a disaster in the eyes of others was really a resounding success.

[Michael St George]

So - in other words, bullshit really does baffle brains. Good to see it confirmed