MIT Sloan Management Review

Corporate Strategy, Human Resource Management and Industrial Relations

Managing Overconfidence

By J. Edward Russo and Paul J. H. Schoemaker

January 15, 1992

GOOD DECISION MAKING REQUIRES MORE THAN KNOWLEDGE OF FACTS, CONCEPTS, AND RELATIONSHIPS. IT ALSO REQUIRES METAKNOWLEDGE — an understanding of the limits of our knowledge. Unfortunately, we tend to have a deeply rooted overconfidence in our beliefs and judgments. Because metaknowledge is not recognized or rewarded in practice, nor instilled during formal education, overconfidence has remained a hidden flaw in managerial decision making. This paper examines the costs, causes, and remedies for overconfidence. It also acknowledges that, although overconfidence distorts decision making, it can serve a purpose during decision implementation.

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To know that we know and that we do not know what we do not know, that id true knowledge. —Confucius

Philosophers and writers have long tried to raise awareness about the difficulty of balancing confidence with realism, yet the consequences of unsupportable confidence continue to plague businesses. Managers deal in opinions — they are bombarded with proposals, estimates, and predictions from people who sincerely believe them. But experience tells managers to suspect the certainty with which these beliefs are stated. For instance:

  • A leading U.S. manufacturer, planning production capacity for a new factory, solicited a projected range of sales from its marketing staff The range turned out to be much too narrow and, consequently, the factory could not adjust to unexpected demand.
  • A loan officer at a major commercial bank felt that his colleagues did not understand their changing competition as well as they thought they did and were refusing to notice signs of coming trouble.
  • In the early 1970s, Royal Dutch/Shell grew concerned that its young geologists too confidently predicted the presence of oil or gas, costing the company millions of dry-well dollars.
  • The sales head for Index Technology, a new software venture, repeatedly received unrealistic sales predictions, not only on amounts but also on how soon contracts would be signed.

Managers know that some opinions they receive from colleagues and subordinates will be accurate and others inaccurate,... To read the complete article, login or sign-up using the form below.

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