Decision Tips
Recognize your tendency to be overconfident.
It’s not what we don’t know that gives us trouble, it’s what we know that ain’t so.
—J. Billings
You can’t underestimate people’s confidence in their opinions. Even experts in their field often think they know more than they do. A few famous quotes illustrate just how off the mark even the “best and the brightest” can be:
“Stocks have reached what looks like a permanently high plateau.” (Irving Fisher, Yale University economist in 1929, just before the market crash and the Great Depression)
“No matter what happens, the U.S. Navy is not going to be caught napping.” (U.S. Secretary of the Navy, December 4, 1941, three days before the surprise attack on Pearl Harbor)
“We don’t like their sound and guitar music is on the way out.” (A Decca Recording Company executive explaining in 1962 why he rejected signing the Beatles)
“There is no reason anyone would want a computer in their home.” (Ken Olson, founder of Digital Equipment Co., in 1977)
It’s probably correct to say that “no problem in judgment and decision making is more prevalent and more potentially catastrophic than overconfidence.”1 Almost all of us suffer from it. Look back on your answers to the overconfidence test in Chapter 11, “Are You Overconfident?” Did you score less than 9 out of 10? If so, join the overconfidence club.
No problem in judgment and decision making is more prevalent and more potentially catastrophic than overconfidence.
As pointed out in Chapter 11, when we’re given factual questions and asked to judge the probability that our answers are correct, we tend to be far too optimistic. We can extend this to say that, in general, people hold unrealistically positive views of themselves and their performance. They overestimate their knowledge, undervalue risk, and overestimate their ability to control events.
“New entrepreneurs wildly overestimate the chances that their enterprises will succeed, business planners grossly underestimate project completion times, and people generally believe that they will be happier, more confident, more hardworking, and less lonely in the future than their peers.”2
Studies have found that when people say they’re 65 percent to 70 percent confident that they’re right, they are actually correct only about 50 percent of the time.3 And when they say they’re 100 percent sure, they tend to only be 70 percent to 85 percent correct.4
We seem to be particularly vulnerable to overconfidence when we’re making self-evaluations. A survey of a million high school seniors found that they all thought they were above average in their ability to get along with others, 60 percent considered themselves to be in the top 10 percent, and a full 25 percent thought they were in the top one percent!5 Most of us also suffer from thinking we’re better than we actually are at performing tasks. For instance, we tend to have an inflated view of our work performance. Statistically speaking, half of all employees must be below-average performers. However, the evidence indicates that the average employee’s estimate of his or her own performance level generally falls around the 75th percentile.6 We additionally tend to believe that our futures will prove to be better than those of others.7
Our overconfidence can really wreak havoc when it comes to our investment decisions.8 It leads us to the erroneous belief that we can pick mutual funds or stocks that will outperform the market.9 During the hey-day of day-trading in the late 1990s, millions of people believed they could outwit the market averages. They traded more often, overestimated expected profits, and subsequently lost billions of dollars.
This optimistic tendency doesn’t apply to all people or situations equally. It’s most likely to surface when confidence is extremely high or accurate judgments are difficult to make.10 So be on guard when someone tells you he or she’s 95 percent or 100 percent sure of anything!
Additionally, those individuals whose intellectual and interpersonal abilities are weakest are most likely to overestimate their performance and ability.11 Apparently, as we become more knowledgeable about an issue, we’re less likely to display overconfidence.12 So overconfidence is most likely to surface when considering issues and problems that are outside our area of expertise. But as the opening quotes in this chapter illustrate, even experts can suffer from overconfidence.
Why do we tend to be overconfident? A number of influences can lead us in this direction.13 First is the illusion of superiority. We tend to have both unrealistically positive views of ourselves and to be unrealistic about our future relative to others. Second is the naïve belief that we can control random events. We want to believe we’re in full control of our destiny, and strong confidence in our decision-making ability reinforces this. Third is our limited ability to imagine all the ways that events can unfold. We become overconfident because we fail to realize how many ways we can be wrong. Fourth is our tendency to seek information that confirms what we already believe. We often start our search for alternatives with an initial favorite and then focus on finding information that supports this favorite rather than look for disconfirming evidence. And finally, we’re not very good at objectively appraising our past decision record. We selectively assess our past decisions by remembering our successes and forgetting our failures. This reinforces our belief that we’re better at predicting the future than we really are.
Confidence is important for success in life, and nothing in this chapter should discourage you from believing in yourself or your ability to make good choices. Unfounded overconfidence, however, can get you into trouble. So what can you do to limit this malady?14 Begin by recognizing that you’re likely to be overconfident and look for signs of that overconfidence. Also, search hard for disconfirming evidence and look for reasons why your prediction might be wrong. The CEO of Houston-based ATP Oil & Gas, for instance, uses this approach when interviewing job candidates. “If I like the person immediately, I will try to think of all the reasons why that individual won’t work out at the company. However, if I am quick to form a judgment that the person probably won’t work out at ATP, I try to find every way to change my mind—to find things about the person that I know are going to work out here. And by taking the reverse position from my immediate instincts, frequently I will learn things that I otherwise would never know.”15
If you have trouble with this process, sometimes asking others to offer counterarguments can help you to better see flaws in your position. Unconstrained by your biases, others often can see things you can’t. Finally, you should adjust your confidence awareness to reflect your level of expertise on an issue. You’re most likely to be overconfident when considering areas outside your expertise. For most of us, this should put us on alert to not be too cocky about our bargaining skills when making a major purchase—such as buying a new car or trying to get the best deal on an apartment rental.16 Our adversaries in these cases are typically professional negotiators, and we’re not. These are instances where overconfidence is likely to lead us to an exaggerated belief about our chances of success.
Recognize your tendency to be overconfident.
Be especially alert to overconfidence when considering issues outside your expertise.
Look for reasons why your predictions or answers might be wrong.