What is overconfidence and how can it be avoided?
One of the most dangerous cognitive biases is overconfidence. Indeed, according to the psychologist Scott Plous, “No problem in judgement and decision making is more prevalent and more potentially catastrophic than overconfidence.” So what is overconfidence, and how can we mitigate it?
Overconfidence means believing in something more strongly than is justified by the evidence, and thinking you know more than you really do. For example, an overconfident gambler might give a horse a 70% chance of winning when everyone thinks it’s more like 40%. She is more certain than she should be.
A useful strategy for mitigating overconfidence, then, is to review your initial estimates and ask yourself, “Am I really that sure? Might I have overlooked something?”. Given the common tendency towards overconfidence, a small adjustment downwards will usually help.
If this doesn’t sound very exciting, that’s the whole point. Good forecasters, like good gamblers, do their best not to get too excited. They weigh up the odds calmly and carefully. They do not get caught up in a surge of enthusiasm, nor are they discouraged by a run of bad luck. This means they don’t get nearly as much of a kick out of winning as your average bettor. An occasional gambler plays for the thrill of an occasional payout, and shrugs off his or her losses. With successful gamblers, it is the other way round; the wins aren’t much fun, but the losses are painful. This is precisely why successful gamblers learn from their experience, while less successful ones don’t. When errors hurt, you strive to avoid them. When you just shrug off your mistakes, you are not so motivated to learn from them.
I’ve been researching this topic for over a decade now, starting with a study of expert gamblers in 2009, which led to a book and a widely-viewed TEDx talk. During my research, I interviewed a successful sports bettor who illustrates my point. While we were talking, the television was showing some horse races he had bet on earlier, but the bettor hardly looked at the screen, only sitting up occasionally when the results were announced. He called most of the races correctly, but he barely even managed a smile as his bets paid out one after another. Only on the few occasions when he lost did he show any emotion, and then it was a burst of anger. He would literally kick himself for getting it wrong. What a contrast with problem gamblers, who get so much of a buzz out of their rare wins that they keep heading back to the card table or slot machine despite their mounting losses.
Perhaps professional gamblers are just more disciplined than the average punter. They work hard to control their emotions and learn from feedback. That’s not to say that successful gamblers don’t enjoy winning. It’s just that it’s a much less visceral thing. A rookie gets an adrenaline rush every time he or she wins. For an experienced professional, it’s more like a nice cup of tea. He or she relishes the cognitive pleasure of getting it right; more like a contestant on University Challenge than a fist-pumping football fan. It might not feel so good at the time, but in the long run, it will deliver better results.
So next time you have to make a business decision, sit back for a moment and ask yourself if you’re being overconfident. Perhaps you have pre-judged the best design for a new product, or simply assumed that consumers will be crazy about something just because it appeals to you. Is there something you’ve overlooked? Have you really listened to the colleagues who disagree with you?
Another cup of tea, anyone?