When systematic overconfidence is bad…

A study of 258 large transportation projects built between 1927 and 1998 in 20 countries found that 90% of projects were more expensive than expected.

On the other hand, 86% of construction projects exceed their initial estimate and cost an average of 28% more than anticipated.

Should we do something to reduce the overconfidence that drives wildly inaccurate estimates and escalation of commitment? Yes!

Our tendency towards overconfidence is deeply ingrained within us. Plenty of studies have consistently revealed this trait, with one striking example being the better-than-average effect, particularly evident when discussing our driving skills.

Surprisingly, despite the fact that more than 90% of car crashes are caused by human error, a significant 73% of US drivers consider themselves better-than-average drivers. Interestingly, this self-assurance is even more pronounced among men, with 8 out of 10 believing their driving skills to be superior to the average.

The research on optimism bias, illusory superiority, and the dunning-kruger effec further supports the notion that we often overestimate our abilities and the likelihood of positive outcomes, often without even realizing it.

While we have recognized instances where conviction and “warranted” overconfidence can be beneficial, particularly in highly uncertain environments, it becomes imperative to discern when such overconfidence turns into a negative factor. By doing so, we can take necessary measures to shield ourselves from its adverse effects.

Can we differentiate between scenarios when confidence and conviction might be good vs bad?

Drawing insights from various perspectives, including biases and heuristics, naturalistic decision making, and nascent studies in environments of radical uncertainty, we can construct a mental model to understand the role of overconfidence.

In certain environments, overconfidence can prove detrimental, leading to failure. However, in high-validity settings, warranted overconfidence may be beneficial, especially when driving innovation.

Despite the potential advantages, success remains the exception rather than the rule, often due to factors beyond our control, such as luck. The challenge lies in our inability to adapt and respond to new information effectively when our confidence becomes a liability.

Even when overconfidence seems justified, arising from a compelling hypothesis that bridges the certainty gap, we must be wary of slipping into commitment bias, where we stubbornly hold on to failing ventures.

“At the moment that quitting becomes the objectively best choice, in practice things generally won’t look particularly grim, even though the present does contain clues that can help you figure out how the future might unfold. The problem is, perhaps because of our aversion to quitting, we tend to rationalize away the clues contained in the present that would allow us to see how bad things really are.” — Annie Duke, Quit: The Power of Knowing When to Walk Away

Tools to Combat Overconfidence

Combating overconfidence requires recognizing and addressing cognitive biases that contribute to escalation of commitment. Some key tools to mitigate overconfidence include:

Kill criteria and ‘tripwires’: Establish predefined thresholds that trigger the reevaluation of decisions. When specific criteria are not met, it prompts us to reconsider our approach and avoid falling deeper into the commitment bias trap.

Premortems: Taking a future perspective and identifying potential negative outcomes in advance allows us to proactively mitigate risks and make more informed decisions.

Monkeys and pedestals: Focus on complexity and significant issues rather than indulging in trivial tasks, as doing so can build false confidence and divert attention from crucial matters.

Discover the power of growth and business development with Chapter3.

Get in touch at https://chapter3.ventures/ or email us info@chapter3.ventures

Visit our Instagram, Twitter, and TikTok for more business tips and daily motivation!