- Research from Mannheim Business School shows that CEO overconfidence is not always a bad thing
- Overconfidence can bring a wealth of benefits to a struggling company
- But only under the right conditions, revealed for the first time in a new study
Overconfidence is often seen as a negative trait in CEOs: booms lead to busts, and billions are lost in high-profile, high-stakes gambles undertaken by cocky leaders.
Elon Musk’s bullish takeover and leadership of Twitter (now X), purchased for $44bn in October 2022, has wiped 71% off its pre-sale value. Musk told lenders they would not lose money on the deal, but Bank of America, Barclays, BNP Paribas, Mizuho, Morgan Stanley, and Société Générale are looking at significant losses incurred in their $13bn financing of the deal.
And he is not alone. Mark Zuckerberg’s stilted belief in his own vision led him to bet his company’s future on the “Metaverse,” which has proved a dud. Even as sales of VR headsets and AR glasses plummeted, Meta poured tens of billions into the Metaverse while losing $800bn in market capitalization. Its flagship VR app, Horizon Worlds, has attracted fewer than 300,000 monthly users.
Aside from disappointing your customers, underwhelming your investors, and losing money hand over fist, overconfidence can result in legal complications, too. In the most spectacular CEO supernova of the year, Sam Bankman-Fried’s use of his customers’ money (to the tune of $10bn), led to the collapse of his crypto company FTX, once valued at $32bn, and the worldwide devastation of the crypto market. After hitting $3 trillion in November 2021, the overall value of the crypto market hit a two-year low of $796 billion when FTX failed. Bankman-Fried was found guilty of defrauding customers in a Manhattan court and is facing up to 110 years in prison.
Confidence and success
There is, though, a flip side to this. Confidence is essential to leadership and vision. An uncompromising focus can lead to results. Steadfast belief in an idea, product, or company is necessary in convincing others to buy into it, and in attracting investment. Powerful personalities head many hyper-successful companies, encouraging investment and belief in their futures (there is a reason why Musk was able to raise $44bn).
Sam Altman, the CEO of OpenAI believes that CEOs should have “almost too much self-belief.” In a 2019 blog, he writes that, “The most successful people I know believe in themselves almost to the point of delusion.” OpenAI has been a runaway success and is looking at a $100bn valuation this year. Altman was ousted as CEO by his board due to concerns over his leadership, but the coup was short-lived. Broad grassroots support among staff (as well as intervention from Microsoft, a multibillion-dollar investor in OpenAI) resulted in him being swiftly reinstated. Altman’s debacle prompts the question, is overconfidence in a CEO a positive, or a negative?
The social science behind overconfidence
Brand-new research from Mannheim Business School has found that CEO overconfidence is not necessarily a bad thing for companies, but that it depends on when the CEO is appointed.
The study found that the success of an overconfident (overconfidence defined by the authors as “the systematic overestimation of personal abilities and the underestimation of uncertain, negative outcomes”) CEO depends on whether they are the incumbent who steered their organisation into the mire of failure, or a successor hired to rescue the company. In other words, an incumbent CEO exhibiting overconfidence can be a hinderance to recovery, while a bold new CEO can save a company.
Conducted by Assistant Professor Marc Kowalzick (formerly Mannheim Business School, now Rotterdam School of Management), in partnership with colleagues Assistant Professor Jan-Philipp Ahrens (Mannheim Business School), Jochim G. Lauterbach (Technical University of Munich), and Associate Professor Yi Tang (Hong Kong University), the study provided an in-depth analysis of the data on firms’ turnaround performances and CEO overconfidence. By collecting evidence from 240 companies in the S&P 1500 index during the fiscal years 1992-2016, the researchers were able to locate where overconfidence can bring value to a company, and where it can cause harm.
The researchers found that successor CEOs with inflated views of their own capabilities can turn around performance by formulating bold visions for organisational recovery that reassure stakeholders and energise employees in situations that require and reward vigorous decision-making.
Contrary to this, overconfident incumbent CEOs can hurt turnaround performance by ignoring opposition to their current strategic orientation or by attempting to ride out organisational decline. They can, according to the study, become “paralysed” by the decline and may “not appreciate the need to alter their existing strategies to ensure turnaround success.”
The most significant differentiating factor in the success of an overconfident CEO is whether they are a new addition to the firm, or if they were responsible for overseeing the decline.
Dr Ahrens and his co-authors found that replacing overconfident incumbents improves turnaround performance, and that overconfident successors hired during decline enhance turnaround performance.
The study’s finding, that overconfidence can play out differently between incumbent and successor CEOs, offers a new view of CEO overconfidence and how certain behaviours and attitudes translate into organisational outcomes that has relevance for both academia and the wider business world.
“Turning a firm around is an arcane managerial art, sometimes even considered ‘black magic,’ because even small deviations from the path to restore organisational health can lead to certain failure,” says Jan-Philipp Ahrens, Head of the Interdisciplinary Research Group Family Firms of the University of Mannheim.
While we may think of an ideal modern leader as humble and deferential, this study prompts us to re-evaluate where a bolshy, overconfident CEO could bring value. It may be in the most unexpected of places. When an overconfident CEO tanks a company, it might be, counterintuitively, time to hire yet another overconfident CEO.
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