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May 19, 2021
08:00 AM - 09:00 AM

The impact of overconfidence on firm performance: It’s not what you think.

Speaker: Wayne Borchardt, Founder and chief executive, The Decision Advisory Group
Moderator: Carl Spetzler, Chairman, Strategic Decisions Group
May 19, 2021 at 8:00 am PT / 11:00 am ET

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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