Category: It’s starting to become a weekly occurrence that I have an “Eureka!” moment after the Managerial Effectiveness class. Yesterday, we dealt with two topics: overconfidence in estimates and decision making, and strategies for managing conflict in decision making teams.
As a professional prognosticator of probability, managing overconfidence is something I really need to be aware of. I’m often guilty of behaving as if I am 100% certain on a marketing projection, when in reality the estimate is definitely not so cut and dry. I can take some comfort that I am not alone in my professional overconfidence; in the class survey yesterday, over 90% of my classmates believe they are in the top half of the class. Healthy egos abound!
Wanting to learn more about dealing with overconfidence, I found an article titled “The Curious Paradox of Optimism Bias” by Duke professor Dan Ariely. While the article doesn’t directly deal with managing overconfidence, I think the article does a great job highlighting the positives and negatives to optimism with respect to the current economic situation.
There’s obviously plenty of positives to being an optimistic person. People want to be around you, you have more fun (or at least less stress), and you take risks you wouldn’t otherwise do if you were more realistic about the probabilities of success (dating, starting a business, writing a blog post about a potential future professor, etc.).
However, the negatives of optimism can have much larger consequences. Professor Ariely writes:
This recession has delivered a huge lesson in how far human folly and irrationality can lead us astray–into conflicts of interest, extrapolating long-term projections from short-term trends, putting too much trust in economic advisers, and so on. I don’t anticipate that the downturn will change human nature. We aren’t better, more thoughtful people now. And we’re unlikely to become phoenixes rising from our fiscal ashes.
The dismal science indeed.
Working for a global financial services provider, I’ve seen first hand how all of these negatives to over-optimism have played out over the past several years. In the credit card industry, an easy rule of thumb has been that charge-off rates rise about 1:1 with a rise in the unemployment rate (5% Unemployment, 5% CO, etc.). Optimism/faith in this identity led many lenders to ignore the fact that nothing says that the relationship has to hold! We can see now that losses are skyrocketing in all forms of consumer lending, with the relationship now moving to 1:2 or even higher.
A “re-calibration” strategy was one of the main solutions presented yesterday in the discussion of controlling overconfidence. By playing scenario games, workers can get rapid feedback on how estimates can vary depending on small changes in the assumptions, and thus learning how to improve accuracy. The one positive from the current recession is that this type of game is playing out in real time! From the learning derived from living through such a dramatic business climate, the current generation of workers will now start to account for much more extreme (negative) scenarios when making future business decisions.
Rather than conclude on a dour note, one more quote from the article:
But I am hopeful that if we take these painful lessons to heart (and mind), we might create lasting changes.
There are signs we are doing so, sometimes because there’s no other choice.
With that thought in mind, back to my marathon study session….
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