[MUSIC PLAYING] COLLIN RAYMOND: Hi. My name's Collin Raymond. I'm an associate professor at the Samuel Curtis Johnson Graduate School of Management in the Cornell SC Johnson College of Business. Most of us would really like to think that we're going to succeed and do super well at whatever we put our mind to. In fact, Daniel Kahneman, who won the Nobel Prize in economics, once said that of all of the kinds of biases he studied, overconfidence was the most significant.
Now overconfidence has been demonstrated time and time again in very, very controlled lab settings, both by psychologists and economists. However, it's been super difficult for researchers to demonstrate overconfidence in important real world settings. For example, regarding job performance.
And this raises two big questions. First of all, in real world settings where individuals are getting repeated feedback and gaining experience at tasks they're doing, can they maintain overconfidence in the face of evidence to the contrary? Second, if individuals can maintain their overconfidence, what are the psychological mechanisms?
What are the psychological tricks that they engage in order to make sure this overconfidence stays with them? I worked with a company that manages over 200 branches and has managers for each branch. And these managers compete with each other every quarter for big bonuses. We ran an experiment with the managers where we went in and we asked them to predict how they were going to perform in future orders and how they performed in past quarters.
We had three main findings. First, managers are overconfident. We found that over 30% of managers thought they were going to be in the top one fifth of performers in the future. Moreover, fewer than 10% of managers thought they were going to be in the bottom one fifth of performers in the future.
Obviously, if managers were correctly confident, these two percentages should be equal. We also found that this overconfidence was persistent. These percentages were the same whether we looked at managers who had just started with the firm or whether these were managers who had been working with the firm for several years.
Second, we found that managers who perform poorly in the past tended to misremember their performance. They exhibited rosy recall in that they recalled their performance as being better than it actually was.
Third, we found that rosy recall was related to overconfident predictions. Managers who tended to remember their past performance as being better than it was also tended to be overconfident about their future performance. Thus we found both persistent overconfidence as well as a psychological mechanism that enabled this to happen. Managers who did poorly in the past simply forgot about their poor performance and instead substituted in memories of them doing better. And this enabled them to maintain their beliefs that they're going to do well in the future.
Overconfident managers think they're going to get more money in the future than they actually will. This means that they're probably going to stay around the firm for longer than they otherwise would. Does the firm do better by having these overconfident managers around this depends. We find that overconfident managers tend to manage their branches in a very different way. They tend to hire too few assistants which means they reduce labor costs, but it also means that they have reduced customer satisfaction. And depending on what the firm's bottom line depends on labor costs versus customer satisfaction, this could either be good or bad for the firm.
If policymakers want to intervene and help solve overconfidence, our research also suggests an intervention. We should try to ensure that individuals maintain accurate memories about their past performance. They don't engage in rosy recall.
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Overconfidence is a significant bias evaluated in many lab settings, but researchers have struggled to examine it in real-world settings, where individuals respond to positive and negative feedback. Studying managers in a competitive setting, Raymond and his co-authors observed psychological functions allowing managers to maintain overconfidence despite poor past performance. This “rosy recall” is also linked to overconfident predictions of future pay and performance. Overconfident managers are likely to save company money by hiring fewer support personnel, but to sacrifice a level of customer satisfaction in doing so.