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.
Wayne Borchardt is the founder and chief executive of The Decision Advisory Group. He originally trained and practised as an engineer, then spent 23 years with Accenture, the last 11 of which as a Managing Director in the Strategy practice. He has 27 years of strategy and management consulting experience with multinationals and large local firms in Africa, Europe and Asia, across industries including Consumer Goods, Retail, Industrials, Healthcare, and Financial Services. His functional focus and passion is Strategic Decision Making. He spearheaded the development, training and communication of Behavioral Science and Decision Analysis concepts within Accenture Strategy, ran the training for four years at Accenture’s global Strategy College, and is now independently providing education and consulting services in that space. He recently submitted his Ph.D. on "The impact of overconfidence on firm performance: an empirical analysis”.
Carl Spetzler, a decision professional, has 40+ years of experience helping top management create innovative new strategies that deal with the complexities of uncertainty and risk over long time horizons. He is the Chairman of the Board of management consulting firm Strategic Decisions Group and a Fellow and Past President of the Society of Decision Professionals. The author of Decision Quality: Value Creation from Better Business Decisions, he frequently leads senior executive retreats, briefings, and courses on decision making and risk management. His widely recognized for his contributions to the fields of decision science and decision quality.