Overconfidence Bias: Meaning, Impact and How To Overcome It
By Angela Kayode-Sanni
| Last updated:
Aug 16
|
10 min read
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Overconfidence bias is a tendency to have a wrong assessment of one’s abilities, skills, intellect, and talent. It is a dangerous and false belief of an individual’s value or ability always to make the right decisions.
It is expressed in various aspects of human interactions and the outcome can be dangerous.
In this guide, we will discuss the meaning of overconfidence bias, its impact, and ways to overcome it.
Overconfidence bias is the propensity of people to possess excessive confidence and a deep belief that their abilities, knowledge, and ideas are the best. This bias is not limited to gender, age experience, and area of knowledge, however, the level varies from one individual to another.
Overconfidence is a cognitive bias that can affect the success in the life of individuals. The overconfidence bias is often expressed when people are overly confident in their abilities such as teaching, cooking driving, baking, decision-making, etc.
In cases like the aforementioned, this overconfidence involves a matter of character. This is so because most people believe that they are more ethical when compared with others.
Because of this overconfidence bias, most people assume that they will always take the right decision when confronted with ethical challenges. This overconfidence in moral character would lead people to act without an honest reflection of their actions or inactions.
For example, people who give to charities or volunteer their services usually commit to an amount of money or time that they are oftentimes unable to meet up with.
This is a practice where people rate themselves better than they truly are. This set of people truly thinks that they are on a very high pedestal, in terms of their behavior, attitude, skills, and aptitude.
The result of this overestimation in people investing/believing in them based on the way they present themselves is mostly a poorly calculated risk that leads to heavy losses.
The illusion of being in control is another form of overconfidence bias. Many people believe that they have control over situations and results.
For instance, people set goals and create a timeline to meet those goals, believing that they have everything in control, however, they fall ill or some other incident occurs in their lives that set them off track.
The same thing applies to business; forecasts are made for sales for a certain period and investors buy in, then Covid 19 happened all of a sudden, and the whole world had to shut down.
This makes it very clear that control is an illusion.
This occurs when people without any tangible evidence to back up or support their claim, underestimate the amount of time required to complete a task.
While is okay to be optimistic and have a positive view of life, this type of overconfidence bias in time planning would cause a lot of disappointments and affect other people’s perception of the individual and whatever abilities they possess.
This is when an individual consistently or doggedly believes that nothing will go wrong. This overconfidence bias was expressed by the builders of the Titanic ship, which was built on the 31st of May 1911.
The builders were so confident that the ship was so sturdy and said that even God could not sink it. Unfortunately, the ship sank on its maiden voyage in the North Atlantic Ocean on the 12 of April 1912, when it collided with the tip of an iceberg.
This strong belief that nothing could go wrong to the extent of evoking the divine, negatively, is an overestimation of the possibility of the likely result.
The easiest way to understand what overconfidence bias looks like is by the real-life expression of this phenomenon as depicted above.
The impact of overconfidence bias in the world can be overreaching if not properly managed. For example, when Covid 19 broke out in the US in 2020, the current President at that time was so confident that they could manage the outbreak without the proper structure and processes for managing the disease like social distancing, wearing a nose mask, etc.
The implication of these for the US was a huge number of fatalities that could have been avoided or managed to a minimum if their leader did not express the overconfidence bias in his abilities to manage the spread.
In the financial markets, overconfidence bias has led to reputable people making unfortunate decisions to end their own life due to projections they made about the stock market, causing them to invest all their resources.
The 1929 crash was preceded by a decade of record economic growth and speculation in a bull market that saw the DJIA skyrocket over five years. The crash of the stock market was a huge blow to everyone who invested all they had into it, especially to people who invested all their life savings into the stock market as their retirement plan.
Arguments by Barber and Odean(2001) further reinforced this fact. They stated that more trading is the cause of overconfidence and this is because with each successful return on investments, confidence is boosted and the result is overconfidence bias.
Overconfidence bias has also impacted the quality of decisions taken in the corporate world. This is evident in the rise and fall of Kodak, the once leading photography equipment manufacturer globally.
The advent of mobile phones and digital cameras was not a shock to them; they knew it was coming, however, the decision-makers were so confident in their analog cameras and as a result, they did not make the transition to digital cameras when they still could, and by the time they caught on it was too late.
Overconfidence bias has impacted the decisions of business leaders and everyday people globally across different spheres of life. Because of this phenomenon, people and organizations have overestimated their skills and knowledge, underestimated risks, and overestimated their ability to control events.
This has caused them to disregard data and expert advice and this has led to far-reaching consequences. Overconfidence has also impacted many aspects of life and has had strategic implications such as ;
Companies can fail when there is no alignment between the entrepreneur’s perception of the environment and the actual environment context.
For example, say you had a sale forecast for a period to be at 40% even when your projected revenue based on real data does not support your estimate, but despite this, you use this figure and base all other decisions on this assumption. This could lead to a failed strategy and affect key stakeholders.
Imagine you are part of a product design team and you make changes to a client’s product based on their feedback without your line manager’s approval. Based on your assumption that you are great at your job, you believe that you do not need to get approval from your line manager to make this change.
However, feedback from your boss and their reactions could show that going over your head was not a great idea.
Let’s look into some more real-life overconfidence bias examples for better understanding:
This real estate American company experienced the largest real estate bankruptcy in American history. GGP had over 200 malls at the peak of its success, however, it had a debt problem in 2018 and had some difficulty refinancing its debt.
The only other option they had was to generate funds by selling equity, however, they were so confident that they could sustain their business without selling some shares. Their overconfidence bias led to them missing the opportunity to sell their shares profitably when they could and the company went bankrupt.
The beautiful Sydney Opera House was built by a team of experienced folks, who estimated that the project would be completed in 4 years at the cost of 4, million Australian dollars.
However, the project lasted 14 years and the final cost was a whopping 102 million Australian dollars. This is a perfect example of unrealistic timing optimism.
The Boston big dig is the chief highway that spans the heart of Boston. The project was scheduled to be finished in 1988 at the cost of 2.8 million dollars. Instead, it took 8 years to finish and cost 15 million US dollars, excluding the interest on the debt they took, which brought the final cost to 22 billion dollars.
In 1986, the Challenger space shuttle crashed and led to the death of all 7 crew members on board. This disaster was caused by a malfunction of a part called the O ring.
This malfunction was communicated to the crew members by the manufacturers, but they ignored expert advice and believed that the mission would be successful against all odds. Their overconfidence cost them their life.
In 1996 a group of climbers tried to scale Mount Everest and on their way down, they got into a snowstorm that led to 8 casualties. 2 of the group members were elite experienced climbers, who acted as group leaders, while on the course they faced difficulties, delays and the threat of a possible snowstorm.
The best decision would have been to abort the task and have everyone return home. especially as they had been informed that the deadline to beat the weather safely was 2:00 clock. They exceeded the deadline and were confident of safe descent despite this, alas things did not work out as planned.
It is important to note that everyone tends towards expressing overconfidence, this knowledge in itself is the first step to overcoming this bias. There are several ways to overcome overconfidence bias.
Understanding your limitations as an individual would allow you to entertain and consider other people’s perspectives. This would encourage objectivity in your decision-making.
The second step is to consider the consequences of your decisions. As a rule, always have a worst-case scenario planning plot when considering your decisions. This would put you in check when you realize how much harm you would experience if things do not go as planned.
Consider your past actions and the outcomes, that way you can identify ways or times when you expressed overconfidence and the results you got. This way can spot past mistakes and avoid them subsequently.
Taking these steps has the potential to help you avoid poor decisions in all aspects of your life and further build your brand as someone or a business that can be trusted.
Other steps you can take are:
Overconfidence is a phenomenon as old as time, it has been expressed in every aspect, even in religion. Overconfidence is when people, from newbies to experts, overestimate their abilities.
This concept is even depicted in the popular bible story of David and Goliath, where an experienced soldier with sophisticated armor was defeated by a young boy with a sling and a stone.
Reading stories like this, as well as the contemporary experiences of others would help you avoid exhibiting overconfidence bias and make you a better person, whose decisions or opinions others can trust and adopt.
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