Decision Making Biases Part 1 - Overconfidence
We all hope that we make rational decisions however we are almost always under an array of pressures that can impair our decision making. To be a better leader, it is important you understand how decision making biases can influence you. In this first of a series of posts, we look at overconfidence and the reasons for it.
Past success
A salesperson who has consistently met or exceeded their sales targets may become overconfident in their abilities and assume they can continue to do so without putting in as much effort. For example, in 2014, BlackBerry's then-CEO John Chen expressed overconfidence in the company's future, despite its dwindling market share and inability to keep up with competitors like Apple and Samsung. Chen stated that he could "make money in the mobile business" and that he was "confident" the company could turn itself around. However, BlackBerry continued to struggle and eventually shifted its focus to enterprise software and cybersecurity. In 2019, Deutsche Bank CEO, Christian Sewing, expressed confidence in the bank's restructuring plan, citing the successful turnaround of the bank's Postbank unit. However, just a year later, the bank announced that it would be cutting 18,000 jobs and exiting its equities trading business due to poor performance.
Some professions such as stock market trading or areas of law practice may attract individuals with a strong competitive nature which coupled by a belief in their past success as a future factor may lead to overconfidence.
Lack of feedback
An employee who is not given regular feedback on their performance may assume that they are doing a great job and that their work is of high quality, even if it isn't. For example, in 2017, United Airlines faced widespread backlash after a passenger was forcibly dragged off a flight due to overbooking. The incident was seen as a failure of the company's customer service policies and sparked a public relations crisis. However, United's CEO at the time, Oscar Munoz, initially defended the airline's actions and praised the staff's "properly following established procedures." Munoz later apologised and acknowledged that the incident was a failure on the part of the company.
Looking the other direction, a lack of feedback or ground truth is typical in a autocratic leader. Followers are afraid to deliver bad news for fear of repercussions against them. In turn their understanding of what the situation really is is flawed and they make bad decisions based on it.
Personal Biases
A manager may overestimate their own abilities and assume that their way of doing things is always the best way, even if it may not be the most effective or efficient. For example, in 2018, Elon Musk, CEO of Tesla, made headlines for his overconfidence in the company's ability to produce electric cars on a massive scale. Musk dismissed concerns about production delays and quality issues, stating that Tesla was "quite likely" to achieve its production targets. However, the company faced numerous challenges and setbacks resulting in Musk sleeping on the shop floor for months. Ultimately recovering this situation, at the time it resulted in a drop in stock price and increased scrutiny from investors and the business press.
When teaching, I use the Thomas-Kilmann Conflict Mode Instrument for participants to understand the impact of personal bias and complete a self assessment to understand theirs.
Peer comparisons
An employee may compare themselves to their coworkers and assume that they are better than everyone else, leading to overconfidence and a lack of collaboration. Peer comparison bias can also be the result of over focussing on the competition instead of looking for creative opportunities at home.
In the early 2000s, Toshiba was competing with other Japanese electronics companies, such as Sony and Panasonic, in the highly competitive consumer electronics industry. Toshiba's executives were obsessed with beating their rivals and becoming the market leader, which led to them taking significant risks and making ambitious investments.
However, their decision-making was heavily influenced by peer comparison, and they failed to recognize the unique strengths and weaknesses of their own company. As a result, Toshiba made several disastrous investments, such as acquiring the U.S. nuclear company Westinghouse Electric, which ultimately led to massive losses and a scandal that tarnished the company's reputation.
Toshiba's executives had become overconfident in their ability to outperform their peers and ignored the risks associated with their investments. This overconfidence was fueled by the belief that they had to keep up with their competitors, even if it meant taking on more risk than they could handle.
Pressure
An executive may set aggressive revenue targets for the company and assume that they can achieve them without taking into account external factors, such as economic conditions or industry trends. For example, in 2019, Boeing faced a public relations crisis after two of its 737 Max airplanes crashed due to a software malfunction. The crashes were attributed to a faulty automated system that Boeing had developed to compete with Airbus. However, Boeing executives had reportedly set aggressive production and revenue targets for the 737 Max without adequately addressing safety concerns or informing regulators.
The Volkswagen Dieselgate Scandal is also a good example of pressure leading to poor or unethical decisions. Read this very good article written by Carlos Santos on "VW Emissions and the 3 factors that drove it".
Ignorance
A project manager may be overconfident in their ability to deliver a complex project on time and within budget without fully understanding the scope of the work and the resources required. For example, in 2018, the opening of Berlin's new airport was delayed for the fifth time, with officials citing "technical issues" and "construction problems." The project had been beset by setbacks and delays since its inception in 2006, with officials repeatedly underestimating the complexity of the project and the resources required to complete it. It eventually opened on 31 October 2020.
I actually lived this one having moved from the UK to Berlin near the new airport hoping to get a job there. It beggars belief how badly this project was handled but also underlined the complexity of opposing forces when politics gets involved in a major project.
Conclusion
So that is a walk through overconfidence as a decision making bias with plenty of examples to reinforce your understanding of how it can lead to bad decision making. It is an easy trap to fall into but hopefully with a deeper understanding of some of its triggers, you will avoid it.
In Part 2 we shall look at Confirmation Bias.