Edited by Foxit Reader Copyright(C) by Foxit Software Company,2005-2007 For Evaluation Only.

F O R E T H O U G . .
A survey of ideas, trends, people, and practices on the business horizon


When Business Is a Confidence Game
You can't survive in business without a healthy sense of confidence. But misplaced confidence can cause big problems.

byj. Wesley Hutchinson and Joseph W.Alba

It's an uncertain world, and executives have to work with incomplete information all the time. But some decisions seem easier to make than others-and that matters. If you're confident that a project will work out, for example, you're likely to make a correspondingly high investment in it. You won't put nearly as much time and energy into what looks like an iffy proposal, if you go through with it at all. 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? After reviewing hundreds of "calibration" studies-measuring the gap between what people know and what they think they know-we've found that the short answer is no. The studies indicate that confidence tends to be misplaced in two ways. In most cases, we tend to be overconfi20

dent-that is, we're more sure than we should be that our decision is the right one. This is especially problematic in situations where the degree of certainty is very high. For instance, those participants in the caiibration studies - usually college students, but also professionals such as meteorologists, economic forecasters, andfinancialanalysts - who said they were 90% confident about a decision turned out to be right about the resuits of their decision only 70% to 80% ofthe time. But there are occasional situations when we're underconfident. When we think we're just guessingthat is, when our confidence level is only around 50%-it turns out our chance of being right is actually better than even. Keeping our confidence calibrated is tough. On the one hand, we tend to consider a person's lack of confidence as a sign of weakness; executives in particular subscribe to this theory. On the other

hand, for decisions that seem extremely difficult to make, it's acceptable to say that we're merely guessing when in fact we have vague notions or gut instincts that guide us to the answer that's more often right than wrong. There are several ways that managers cancalibrate their confidence-particularly so they can avoid being overconfident in the wrong situations. Check yourself. To match confidence with accuracy, it helps to think twice about decisions that seem close to being sure things. Grill a manager or salesperson who's "absolutely sure" to get the deal or make the number that quarter, and the real odds of that person achieving those results are likely to be much less than 100%. Force yourselves to consider alternative scenarios. This process is especially important in business, where decision makers might not have useful feedback from past decisions to

But when information is lacking. you're likely to decide quickly and then rally the troops to move forward aggressively on the project.2005-2007 For Evaluation Only. it helps to be aware ofthe kinds . In the calibraJUNE 2001 tion studies. When your marketing manager has bold plans to reshape the company's brand. immediate feedback on their predictions. recall the countless bungled efforts by other companies to reposition theirs. A little knowledge can be a dangerous thing. If the costs involved aren't fixed-for example. Joseph W. In fact. Business is about taking chances. People tend to confuse their familiarity with a topic with true expertise about it. the stakes in this confidence game can be extremely high." particularly given the human tendencies to focus on confirming information and to discount contrary facts. If you're brimming with confidence. and the results are often ambiguous or don't manifest themselves until far in the future. such as meteorologists. The professionals whose decisions are most consistently calibrated are those who receive frequent. it rarely helps to "sleep on it. It's good to be cautious. There's little cost to being overconfident because it doesn't affect how much you spend. people got in trouble when they moved out of their domain of expertise: the accuracy of their decisions fell while their confidence stayed high. Clearly. that's still enough to justify going ahead with the project. Most decisions are unique. Unless you expect to get fresh information. Alba Is a marketing professor at the University of Florida in Gainesville. Overconfidence can actually be good when you're making yes-or-no choices. for example. in one location or another-then it's better to be circumspect. if you have to decide whether to build a large factory or a small one. Overconfidence in this kind of situation can get you in trouble because you are likely to invest more in a project when you think the chances of success are higher. Just look at the excessive premiums that a number of corporate acquirers paid for their targets in recent years. They frequently overestimate their skills and knowledge compared with those of their peers. In assessing whether you're overconfident. Be honest about what you really know. don't try to beat the odds. not to mention the bubble in Internet stocks.upenn. Let's say you have to make a decision in which the costs involved are fixed. even if your decision has only a 70% chance of turning out to be correct. y. Don't draw out the process. Reprint FOIO6A draw on. but mulling over a decision usually boosts confidence without actually improving accuracy. of decisions you're making. Wesley Hutchinson is a marketing professor at the University of Penrtsylvania's Wharton School of Business in Philadelphia.eduAiutch/. you either build a factory or you don't.Edited by Foxit Reader Copyright(C) by Foxit Software Company. Look soberly at the business plan instead of simply getting caught up in the manager's enthusiasm. Make sure you're clear on why you will succeed where others have failed. wharton. Play the odds. More information can be found at http-//mktgweb. People also have a strong bias to think that anything they remember is true even when they've forgotten the source oftheir information.

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