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The Impact of Overconfidence in Firm Performance: It's Not What You Think

Wayne Borchardt, Founder and Chief Executive, The Decision Advisory Group
May 19, 2021 (SDP Invited Talk)

Abstract: Is overconfidence present in a firm’s top management team and, if so, how does it impact management’s strategic decision making and hence their firm’s performance? From our examination of S&P1500 firms over the last decade, we find that an overestimating team, those being overly optimistic about their prospects, are plausibly causing negative firm performance. And, an uncorrelated dynamic is that an overprecise team, those having excessive certainty regarding the accuracy of their beliefs, are plausibly causing positive firm performance. In fact, one third of firm value might be ascribed to overconfidence, with the "specific pessimists” creating this value and the "vague optimists” destroying it. This has practical implications for corporate governance, the recruitment and promotion of senior executives, and investment strategies.

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organizatioal capability orgcap, culture cultr, decision quality decqual, cognitive biases cogbias

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