Faculty Q&A: Managerial Over-Optimism
In today’s Q&A, Professor Gilles Hilary, Houston Term Professor of Accounting, discusses his research on the benefits of managerial over-optimism:
1. What is the difference between over-optimism and over confidence?
Over-optimism is the notion that things will go well, that our chances of winning the lottery are high and our risk of getting cancer is low. In contrast, over-confidence is related to the notion that our skills (or our knowledge) are better than they really are: we drive better than most people, we can accurately predict Apple stock price a year from now or we know better than listening to the so-called experts before making a decision.
2. How do firms benefit from managerial over-optimism?
Our findings suggest that efforts and optimism move together. Once we are convinced that we discovered a winning recipe, we work hard at making it perfect. At least, this is what we find for executives. Once they are convinced that their recent successes are due to their own actions and thus will persist, they work harder and obtain better results than they would have without this illusion.
3. What kind of managers often experience over-optimism bias?
To some extent, over-optimism affects all of us. However, our research indicates that when the environment is more complex and harder to understand, executives are more subject to over-confidence and over-optimism. As they get more experienced, they become better calibrated and are less subject to over-optimism.
4. Why is over-optimism unsustainable?
Facts are stubborn things. After a while, two things tend to happen. First, people understand to a greater extend the consequences of their actions and have more accurate expectations. Second, over long periods, exceptional successes revert to a more normal performance level or even turn into failures. People sober up and lose their over-optimism. Until the next lucky streak arrives, of-course. Then, it is deja vu all over again.
To learn more about his research, visit http://msb.georgetown.edu/newsroom/news/benefit-seeing-brightside.
