The Danger of Overconfidence

There is an interesting lecture on Behavioral Finance by Yale professor Robert Shiller. In it, he spoke about how people tend to be overconfident. They overestimate their ability to perform. It happens not just in the financial world, but also in our daily life. One example Robert Shiller gave is that students tend to overestimate how their college’s team will perform in a match against other college.
I have an experience with overconfidence myself. A few years ago, some friends and I worked on a software project. We estimated that we could finish the project in three months. Do you know how much time it eventually took? Fourteen months! That shows how we underestimated the complexity of the project and overestimated our ability to handle it.
So, overconfidence is a common problem. Being pessimistic isn’t good, of course. But being overconfident isn’t good either. Here are two reasons why:

  1. You may fail to deliver on your promise
    That’s what happened to my team. We failed badly to deliver on our promise. That lesson taught me to be more careful and realistic next time.
  2. You may blame yourself too much
    This is the other side of being overconfident. When you are overconfident about something and fail, you may blame yourself too much for the outcome. Robert Shiller mentioned a finding in Searching for a Corporate Savior about how companies often fired their CEOs who didn’t perform as expected even when the entire industry actually declined. The CEO couldn’t be blamed for an industry-wide problem, but the board – who had initially been overconfident with the ability of the”charismatic” CEO – still put the blame on him. This happens at individual level too. You may put all the blame on yourself which make it difficult for you to move forward.

Now that we’ve seen the danger of overconfidence, how can we overcome it? Here are some tips:
1. Acknowledge the role of luck
Many people in the financial market think that they can predict how the market will do. The more they make correct predictions, the more they are confident about their ability. They aren’t aware that in many cases they are just lucky. Hard work is important, but luck does play a big role.
Paul Graham once wrote that Bill Gates is a very smart man, but he is also very lucky. Without the luck factor, he would probably end up near the bottom of the Forbes 400 instead of being one of the richest men in the world. Bill Gates himself said on different occasions about how lucky he is.
Outliers by Malcolm Gladwell discusses the role of luck at great length.
2. Don’t credit yourself too much
Continuing the previous point, be careful not to credit yourself too much when you are successful. Remember that you are probably just lucky.
This doesn’t mean that you don’t need to work hard. After all, successful people are those who capitalize on luck with hard work. But without luck, hard work won’t mean much either.
3. Comprehend the complexity of a project
When you are about to take a project, dig deep into it to really understand the breadth and scope of the project. Be on the lookout for potential pitfalls. Taking the time to really understand the complexity of a project helps you avoid unpleasant surprises later on.
4. Have a cushion
Even after you comprehend the complexity of a project, you still need to have a cushion. Give yourself extra time and resources for unexpected things. But be careful not to give yourself too much cushion. Otherwise you may become less competitive than your competitors.
5. Be prepared for failure
Some people are so confident in themselves that they can’t think of the possibility of failure.
Robert Shiller told the story of Irving Fisher – a Yale professor in the early 20th century – who said that the stock market in 1929 was in “permanently high plateau.” He invested heavily in the stock market, but ended up losing a lot of money in the 1929 crash. Yale needed to buy his house and rented it out to him for him not to be on the street. Did he change his view after all that happened? No. He still insisted that he was right. He borrowed money from his wealthy relatives, invested it, and lost it all.
So be prepared for failure. Doing so will help you recover quickly.
Photo by pincusvt

9 Comments

  1. Nice post. I was a right bugger for being overconfident at one point. Seems it’s inevitable at one point in your life to get that way. Although, after realising – I quickly saw the error of my ways and started changing. Failing to deliver/blaming myself was normal – not anymore. 🙂

  2. Great post! I was listening to a lecture from Reid Kaufmen the founder of Paypal and Linkedin and he said something interesting on the topic of failure. He said, “Work as if you are going to succeed but plan as if failure is possible”. Knowing that you may fail gives you an opportunity to plan and it also keeps you humble.

  3. Craig,

    Failing to deliver/blaming myself was normal – not anymore.

    Nice 🙂
    Ralph,
    That’s a great quote! Thanks for sharing.

  4. Interesting how you have a photo of a snowboarder there because a few years ago, I was overconfident in my skiing abilities as I went for my level 2 ski instructor certification (I was already a level 1 instructor). I ended up failing the level 2. After training for another full winter which taught me more on expanding my comfort zones in areas of skiing that I needed improvement in, I retook the level 2 and finally passed it. I learned from my first failure there. So there were important lessons all round. I even talk about this on one of my episodes of Motivational WebTV.

  5. Like other commentators, I too feel that failure due to over confidence teaches us a lot of lessons in life and i believe those failures are unique and had to be experienced (or everyone experiences it may be of different severity) by everyone.
    I m not so sure about the element of luck and its role in one’s growth. I tend to disagree however. Bill Gates ended up top of the list just because of the choices/decisions he made. Apart from that, I totally agree with other points.
    Among all, I really like the idea of anticipating failures and working out a plan B or at least be prepared to respond to any failure shortens the turnaround time. Sometimes (or rather most of the times), turnaround time makes a lot of difference between winners and losers. The losers when they shorten the turnaround time, they make themselves successful.
    Thanks a lot of wonderful ideas.

  6. Great post. I always come across many productivity and positivity blogs and mostly self-esteem is tackled. This is the first I’ve come across about overconfidence. While low self-esteem is bad, being overconfident shows a sign of fearlessness. And that’s not good because you take all risks without thinking. Like jumping off a bridge, thinking you could fly. Also, being too confident is one sure way to lose friends. No one likes people who are egotistic. There has to be a balance with humility and confidence.
    And I agree that luck plays a big factor in success.
    PS…@Ralph that’s a beautiful quote btw.

  7. Overconfidence is definitely a double-edge sword, but sometimes it’s hard to find a balance. My question to you is, would you rather be overconfident or not very confident?
    If I had a preference, I would rather be overconfident in my abilities. This way, I can learn from my mistakes, as opposed to analyzing every situation to not make any mistakes. Also, I won’t have to look back and regret my lack of aggression in different situations.

  8. Clint,
    What a coincidence 🙂 Thanks for sharing your experience.
    Lakshmi,
    You might want to read Paul Graham’s article that I link to above for his view about Bill Gates. I completely agree that turnaround time can make a big difference. Everyone could fail, but those who recover quickly will be successful sooner.
    Megan,
    You’re right, finding the balance is key.
    Jon,
    I think we’d better learn to find the balance though it’s hard. In the story about Irving Fisher above, he didn’t learn from (nor admit) his mistakes because of his overconfidence. He didn’t make any progress and actually lost more money because of his repeating the same mistakes. In this case, the situation became even worse than inaction.

  9. […] story at Life Optimizer Recommended Posts:You Can Laugh at “Self Doubt” – If You Follow These 5 […]

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