Are You Sure About Confidence?

Are You Sure About Confidence?

Are You Sure About Confidence?

Moneybox
Commentary about business and finance.
July 5 2001 11:30 PM

Are You Sure About Confidence?

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Let's say it occurs to you that your company ought to buy Honeywell. You're about to retire, but then you hear that a rival firm is about to do just that, and you fear the consequences of that union. What do you do? One answer: Make an instant phone call that bursts into the Honeywell board meeting, cook up a counteroffer, and seal the deal in 72 hours. Checking with European regulators can wait, and so can retirement: You act with total confidence.

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Acting with confidence is, generally speaking, a good thing for leaders to do, inside the corporate world and out. Isn't it? This seemingly obvious truth calls to mind a two-page article that appeared in the June issue of the Harvard Business Review. (Unfortunately that piece is no longer up on the HBR site, but you can apparently buy access to it there if you like.) The authors (two marketing professors) asked, "How well does our confidence about decisions match up against the actual results of those decisions? Are we as accurate as we think we are?"

The data they used to find answers consisted of "hundreds of 'calibration' studies—measuring the gap between what people know and what they think they know." They found that subjects who professed to have 90-percent confidence in a particular decision turned out to be correct 70 percent to 80 percent of the time. There was, in other words, a lack of "calibration" between the confident subjects' conclusions and reality. As an example of how things can go awry, they assert that people "frequently overestimate their skills and knowledge compared with those of their peers. In the calibration studies, people got into trouble when they moved out of their domain of expertise: the accuracy of their decisions fell while their confidence stayed high." One check on this sort of thing is being forced to get feedback on matters that are out of one's actual expertise—for instance, checking with someone who knows something about the European regulatory landscape before bragging that your Honeywell acquisition will be "the cleanest deal you've ever seen."

Now, confidence and decisiveness are celebrated virtues in top executives for a good reason: The opposite trait would likely have disastrous consequences. On the other hand, we tend to applaud confidence and decisiveness belatedly—after something has clearly worked out, the original decision of course looks brilliant and visionary, and someone always comes along to tack the word "confident" onto the decision-maker's list of virtues. The truth, of course, is that bad decisions are made with great confidence all the time. So when we talk about the factors that go into sound decision-making (in business or elsewhere), it seems fair to wonder if perhaps confidence isn't a bit overrated.

I would be happy to suggest some other trait that we would be smarter to celebrate and cultivate—but I can't make up my mind what it should be.