Does the irrationality of the ruling class feed on itself? I ask because of a new paper which points out that happier people tend to be more overconfident than others - as long as they are unaware that the source of their happiness is irrelevant to the task in hand.
This raises a possibility - that overconfidence can feed on itself, with the result that people who climb to “top jobs” are even more overconfident than others.
I’m thinking of several mechanisms here. They start from the fact that overconfident people are more likely to get promotion than others because they send out competence cues that fool others into believing they are better than they are. Having won one promotion, though, the overconfident individual becomes more overconfident. This is partly because getting the promotion reinforces his high opinion of himself, but also because the better job increases his happiness and hence his overconfidence - a fact reinforced by the positive correlation (pdf) between income and happiness among individuals.
And when the individual “rises” to a certain level, these mechanisms will be reinforced by others. His subordinates will support his decisions - partly out of deference and partly because the boss selects them himself - thus further bolstering overconfidence. And we might add, following Nick Cohen, censorship, self-censorship and deference in the media will further increase his positive self-image.
In these sense, just as there can be bubbles in share prices so too can there be bubbles in individuals’ self-confidence, because of positive feedback effects.
Now, you might reply here: won’t these bubbles eventually get burst as incompetent but overconfident decision-makers get things wrong?
Not necessarily, for two reasons.
One is luck. Even if a decision-maker is no more likely to get decisions right than random chance, dumb luck will cause some to have successful streaks which will further inflate their self-confidence. This is especially likely if those decisions concern tail risk - that is, they consist of taking bets which have a high probability of yielding small positive pay-offs but with the small chance of catastrophe.
Secondly, rulers have immunizing strategies to protect their self-regard. Be it David Cameron blaming poor UK growth upon the euro crisis or Tesco boss Philip Clarke blaming the “challenging economic environment”, they have endless excuses for not acknowledging their mediocrity.
In this sense, perhaps our rulers - bosses and politicians - live in a bubble. I don’t just mean in Charles Murray’s sense of having different backgrounds and lifestyles from others, important as that is. I mean that they are in a bubble of irrational overconfidence about their ability to control complex organizations and societies.
Yes. Your last paragraph rings a bell for me. I have seen this bubble operating - both in others in a large corporation and in myself when I was looking to set up a partnership many years ago.
This bubble is like the initial stages of falling in love - and leads to the same self-interested filtering out of contradicting data which otherwise might make one think - more accurately and more usefully - twice.
Posted by: Mil | January 29, 2012 at 12:34 PM
Is this not called compound stupidity? If you have a wealthy background and are too stupid to realise how stupid you are, one can easily rise to the level of, for instance, Tony Blair.
Posted by: Ant | January 29, 2012 at 01:46 PM
“happier people tend to be more overconfident than others”
Someone on ‘The Stag Hunter’ went back for the six years (2001-06) and searched for how many times the stenographer's notation for laughter appeared in the released transcripts of each of the Fes’s FOMC (Federal Open Market Committee) meeting. (http://www.dailystaghunt.com/markets/2012/1/12/the-correlation-of-laughter-at-fomc-meetings.html)
Here is a summary.
FOMC Meetings average Recorded Laughs per
2000 16.5
2001 15.375
2002 21.625
2003 19.25
2004 23.125
2005 27.25
2006 43.875
This was referred to in a recent edition of the Keiser Report.
Posted by: George Hallam | January 29, 2012 at 02:41 PM
I agree with most of your points. Another mechanism reinforcing an executive's bubble is the confidence of the people who promoted him. To admit that a subordinate is incompetent implies that you exhibited incompetence in promoting him. This can result in a person lingering in a job for which they are ill-suited (I'm thinking here of the Peter Principle).
Posted by: Norb | January 29, 2012 at 05:36 PM
Norb, I can tell you from experience that I worked a lot better and harder for the people who appointed me than for their successors. Not my opinion - theirs.
I wonder if we couldn't improve productivity in the public sector by a rule that says that when the boss leaves, you're dismissed too. This happens to US Postmasters after each Presidential election, so it wouldn't be a complete leap in the dark.
Posted by: Mike Killingworth | January 29, 2012 at 06:58 PM
Doesn't it worry you at all that you don't know any CEOs, don't really know what they do day to day, and a dealing with people who have every reason to present a confident public face despite what they may think privately? Fertile ground for projecting your prejudices I'd have thought.
I'm not contesting the idea that leadership is grossly over rated, in some quarters.
Posted by: Luis Enrique | January 29, 2012 at 08:41 PM
Luis - I can't speak for Chris but for myself, no. I work in an internal finance role for a medium-sized (~$10B market cap) US bank and interact regularly with C-level managers. My observations of executive performance match Chris' description in his original post quite well.
Mike - I interpret your comment as a critique of my earlier point. I can see how people would try harder for those who promote them, but my point was less about the expenditure of effort and more about the masking of inherent incompetence. Some people get placed into jobs for which they are just not suited. This often occurs because the interpersonal skills that get one promoted to a job differ from the skills that allow one to succeed in this role.
I've seen this many times in sales organizations. Salesmen have the exact skills that allow one to maneuver in a bureaucracy and land senior management roles. However, they often make bad managers because they lack analytical and strategic skills.
The intent of my original comment was to build on Chris' description of subordinates' role in bubble-blowing to include supervisors.
So lets say you have a team of Executive VPs who report to a CEO. EVP 1 recently promoted a subordinate who is not performing well. EVP 1 may be reluctant to fire this person because it will make the error of his original decision obvious and diminish his standing in the eyes of his fellow EVPs and the CEO. He therefore leaves the subordinate in place and finds ways to excuse his poor performance (ie, macro factors beyond his control), thus inflating this subordinate's confidence bubble.
Posted by: Norb | January 29, 2012 at 09:53 PM
The most common way in which overconfidence has been studied is by asking people how confident they are of specific beliefs they hold or answers they provide.
Posted by: Georgia DUI | January 30, 2012 at 10:49 AM
Over-confidence is what happens when natural confidence is insufficiently balanced by natural self-doubt.
The absence of self-doubt promotes risk-seeking (nothing could possibly go wrong), blindness to luck (it's all down to pure talent), and self-delusion (I'm doing God's work).
The bubble of overconfidence doesn't burst because the individual feels no real remorse for actions that cause damage, even when they cannot avoid accepting responsibility: "There was a period of remorse and apology; that period needs to be over".
Posted by: Account Deleted | January 30, 2012 at 12:54 PM