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The Perils
of Overconfidence
By Michael Alan Hamlin
December 29, 2003
When former president Joseph Estrada
was asked by one of his advisors to rethink some of his overtly
corrupt practices because he might get caught, he reported said
of his critics, "What can they do? I'm the president."
Former Iraqi president Saddam Hussein was once confident that his
armed forces would slaughter the American infidels in the desert.
Like Estrada, he's confined by his enemies. Former Indonesian president
Suharto thought that as long as he retained the support of his armed
forces, he and his family would rule in perpetuity. He's not in
jail, but he's not in power, either.
All three leaders held perceptions that were out of sync with reality,
and dangerously so. If they had been merely confident of their political
acumen, each might have survived. It wasn't confidence that did
them in, but overconfidence: an irrational exuberance for a reality
that didn't exist. In the private sector, it's not hard to find
similar examples of irrational overconfidence on the part of many
former top executives that eventually leads to disaster, both personal
and corporate.
Consider some recent examples. Phil Condit abruptly resigned as
CEO of Boeing December 1 after leading the once proud company to
second place in the commercial jet sector - from an overwhelmingly
solid first place. Said to be a brilliant engineer, Condit believed
that his engineering successes inevitably presaged success as a
CEO. Former chairman of France's Vivendi Universal Jean-Marie Messier
was so confident of his continued success that he vowed in his autobiography
to never seek a golden parachute. Golden parachutes are meant to
protect ousted executives from financial ruin. But Messier's now
suing his former employer for a much needed US$25 million.
Closer to home, the Philippines' Mark Jimenez and Indonesia's James
Riady thought they could control US politicians with illegal campaign
contributions. Jimenez now sits in prison, and Riady suddenly became
spiritual. Such examples of overconfidence are far from rare according
to Harvard Business School professor Max H. Bazerman. Bazerman co-chairs
a research program on negotiation, and says that overconfidence
frequently and negatively affects results of negotiations.
Writing in the January issue of Negotiation, a newsletter published
by Harvard Business School Publishing, Bazerman argues that "overconfidence
diminishes incentives to compromise," often with devastating
results. "After all, if you're sure you'll win, why give anything
away?" But, "the failure to make wise tradeoffs often
leads to disappointment at the bargaining table."
Over confidence had a great deal to do with the collapse of Arthur
Andersen. Senior partners felt certain that prosecutors and regulators
would never allow the firm to fail, and would eventually allow it
to extract itself with a painful but endurable slap on the wrist.
That was a fatal miscalculation. While it's not hard to make the
case that prosecutors may have needlessly caused the firm to collapse,
their zealousness was likely at least in part provoked by stonewalling,
overconfident senior partners.
Reining in overconfidence isn't meant to imply that a negotiator
should argue from the perspective of an inferior or less worthy
potential partner. But it does mean that willingness to consider
concessions should be based on a realistic assessment of the possible
outcome of a failure of negotiations. Clearly in Andersen's case,
the failure of negotiations produced catastrophic results.
Bazerman suggests three ways for negotiators to keep overconfidence
in check. First is to embrace uncertainty. "By acknowledging
your own uncertainty about the future and about the other side's
position, you'll become more willing to propose and accept the type
of compromises that lead to mutually beneficial agreements,"
Bazerman counsels.
Second, he recommends enlisting a third party, such as professional
mediators, to help feuding parties reach a voluntary agreement.
"Mediators often focus on reducing negotiators' confidence
in the 'correctness' of their positions," he writes. If a party
is reluctant to bring in a mediator formally, he suggests seeking
out "an objective critique of your plans from a disinterested
adviser."
Finally, Bazerman suggests carefully analyzing the other party's
position for strengths that might "lead you to revise your
plans. By facing up to your bargaining weaknesses, you'll increase
your odds of proposing an offer that's acceptable to the other side.
Once talks are under way, it will be much harder to update overconfident
beliefs." And it will be easier, therefore, to reach an agreement.
After all, there are few instances when no agreement is better than
a negotiated one.
(Michael Alan Hamlin is the managing
director of consultancy TeamAsia and the author of three books on
Asian economies and companies. His latest book is Marketing Asian
Places, of which he is a co-author (Wiley, 2001), and he is currently
at work on High Visibility: The Making and Marketing of Asian Professionals
into Celebrities. Write him at mahamlin@teamasia.com.).
Copyright © 2003 Michael Alan
Hamlin. All Rights Reserved.
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