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When Overconfidence Backfires

Pace Smith learned a hard lesson. A few years ago she and her partner in Pace & Kyeli, a Portland, Ore.-based coaching and education business, developed a teleseminar they called the World-Changing Writing Workshop. It was so successful in terms of enrollment, revenue and buzz generated that they reprised it the following year and topped their performance. Last year they went even bigger, offering up big-name speakers such as Julia Cameron, author of The Artist's Way.

"It completely bombed," Smith says, adding that she was so confident about the seminar that she hadn't even considered the possibility of failure. "I thought I had it figured out. Now I need to return to humility."

Overconfidence contributes
to grim rates of entrepreneurial failure, according to Don Moore, associate professor of management at the University of California, Berkeley's Haas School of Business.

"If entrepreneurs think they're better than others, they may be overly optimistic and start things with low chances of success," he says.

Surprised? That's probably because most of us go through life watching confident people succeed, whether it's political candidates winning elections, cancer patients beating their illness or athletes earning medals. "There's so much evidence supporting the correlation between confidence and success, it's easy to make the mistake that confidence causes the success," Moore says.

Of course, correlation does not imply causation. Moore says an alternative explanation is that the people we're observing are confident because they know they're going to succeed.

In social psychology experiments, manipulating confidence can affect how individuals act. In a 2009 study published in Psychological Science, college students were asked to write about either an experience when they had power or an experience when someone had power over them. Then they were offered the chance to win $5 for correctly predicting the outcome of a rolled die. Subjects in the high-power group always wanted to roll the die, whereas subjects in the "subservient" group were split on whether they wanted to roll or let someone else do it. Additional experiments led researchers to conclude that power leads to the illusion of personal control, which may seem like self-delusion given something as random as rolling dice.

To illustrate how overconfidence can lead to poor outcomes, Moore describes a basketball player with a so-called "hot hand"--the theory that the player is more likely to make a successful shot if his or her previous shot was successful. "Statistically, the hot hand doesn't exist," he says. "But the player believes, so he takes more risks." These actions, such as taking longer shots, "decrease the likelihood of subsequent baskets."

Underconfidence also has its downsides. Pamela Ravenwood used her corporate experience to start a business, Sedona, Ariz.-based SEO Essential Solutions. She doesn't doubt her ability to deliver a valuable service, but she's less sure of her capacity to convince potential clients "over and over again that I can do this," she says. "I'm more of a techie, nerdy introvert than a salesperson."

In a case such as Ravenwood's, it's worth putting in the work to bolster confidence. "The data suggest that having confidence, having optimism, is incredibly important for motivation and persistence," says Adam Galinsky, professor of management at Columbia Business School and the author of the die-rolling study. Not only does confidence give entrepreneurs a sense of control, it also allows people to endure setbacks and continue forward. In addition, Galinsky says, "People who appear more confident get better outcomes from people around [them]." So, a confident veneer could help convince investors to write a check or get shops to stock a new product.

When it comes to confidence, preparation is key, Galinsky concludes. It helps self-doubters like Ravenwood, because "the more prepared you are, the more confident you feel." And for those in the opposite camp--the overconfident--it means a reliance on due diligence rather than a hot hand.

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This article was originally published in the August 2013 print edition of Entrepreneur with the headline: Confidence Games.

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