Overconfidence

“Over-confidence is the way to give your soul to the devil an inch at a time.”

― Joe R. Lansdale, Savage Season

Being a business owner and entrepreneur is a challenging journey.

You have to make decisions with limited time and resources, and few people to bounce questions off of.

And, you need to be confident in your knowledge, skills, and abilities.

It is this level of confidence that allows for the jump from employee to owner/entrepreneur, to start a company, and to take risks to create a successful business.

But you must be aware of overconfidence. Overconfidence bias can destroy your company.

Overconfidence

“Overconfidence is overestimation of one’s accuracy, or, alternatively, an overestimation of ability relative to others, and links with increased failure risk of firms.”

• Hayward et al., 2006

Overconfidence bias is a personal tendency to hold a false and misleading assessment of our skills, intellect, or talent.

In short, it’s an egotistical belief that we’re better than we actually are.

Impact of Overconfidence

When you are overconfident, you use hindsight to reinforce your decisions. You look back at previous successful results and automatically assume a positive outcome without considering the full spectrum of possibilities.

You overestimate your talent and underestimate the risks. As a result, your mind forms an answer that seems right, and you take action without the facts.

The problem with this mindset is that you eliminate any notion of activities out of your control but positively impacted the previous outcome.

What if your previous decision was successful due purely to luck?

Maybe, the stars aligned, and you correctly guessed the timing of the market. But, in hindsight, your mind turns that “guess” into a fact. The worst part, you won’t even know it’s happening.

Hindsight, coupled with overconfidence, is a dangerous combination.

Studies

If you are overconfident, the odds are against you.

Research shows that overconfident entrepreneurs tend to ignore the strengths of their direct competitors (Moore & Cain, 2007). Then, because of your overconfidence, the next thing you know, your competitor disrupts the market and steals your customers.

In addition, overconfident entrepreneurs tend to seek out highly familiar options while neglecting to evaluate other potential alternatives (Winston Sieck, Ed Merkle, & Trish Van Zandt). So, unfortunately, opportunities are missed, and businesses fail.

How to Avoid Being Overconfident

• Take some time to seek out alternative perspectives

Assign one or two people from your team to be the skeptic or devil’s advocate. During a short discussion, have them sell or present other options.

If you don’t have a team, consider finding an experienced mentor that understands your business. Then, develop a network of diverse advisors, people outside your area of expertise, market, or niche.

• Consider conducting a more research 

Spoiler alert—you can find anything on the Internet. It is incredible how much information is discoverable conducting competitive intelligence.

• Reach out to experts

Many experts will be happy to share their knowledge with you.

• Hire based on diversity of thought

Teach your employees the skills they need.  Don’t build a culture of “yes” people.

Encourage alternative perspectives that challenge you and the status quo. But find a balance. You’re the leader; when you make a decision, that’s it.

The Bible

One of the most crushing stories in the Bible is regarding the apostle Peter on the night of Jesus’ betrayal.

In Mark 14:27-31, Jesus warns Peter that he is going to fall away and disavow Jesus.  And it’s going to happen before the next dawn.  Peter dismisses this dire prediction, insisting instead that he will die before denying his Lord.

Mark 14:29-31 says.

 Peter declared, “Even if all fall away, I will not.”

 “Truly I tell you,” Jesus answered, “today—yes, tonight—before the rooster crows twice you yourself will disown me three times.”

 But Peter insisted emphatically, “Even if I have to die with you, I will never disown you.” And all the others said the same.

Boy, was Peter wrong.  Once the pressure was on, his overconfidence dissolved like snow on a sunny day.

Peter found it easy to affirm his love for Jesus when surrounded by the other disciples.  However, when enemies of Jesus surround him, he sang a different tune.

As business leaders and entrepreneurs, we need to have an abundance of confidence.

But as recommended by the Bible, we need to clothe ourselves in humility. Therefore, let none of us think more highly of ourselves than we ought to believe, but rather develop sound judgment and use that to run our businesses.