CEO Confidence

Overconfident CEOs are a liability. They make harmful business decisions based on arrogance and ultimately run their companies into the ground. Right?

Don’t be so confident.

Overconfident CEOs in fact help companies achieve greater innovation by pursuing riskier projects with potentially greater rewards and they typically foster larger investments in research and development, according to a new study in the Journal of Finance.

David Hirshleifer at the University of California, Irvine’s Paul Merage School of Business, and his coauthors studied the effects of overconfident CEOs—leaders who often manage companies through the sheer force of ego and arrogance. The researchers looked at corporate investments in innovation and at the number of patent applications and patent citations filed in the decade between 1993 and 2003.

Hirshleifer and his team found that overconfident CEOs are more likely to achieve innovative success and to advance successful patents.

“An overconfident CEO underestimates the possibility that he or she might be wrong. But the overconfident CEO might be extremely talented,” the professor says. “Albert Einstein was very grudging in accepting quantum theory despite compelling evidence, but no one would deny that he was talented.”

Steve Jobs is perhaps the most famous recent example of an overconfident CEO. He didn’t do so badly.

The bottom line, according to the researchers: An overconfident CEO achieves greater innovation than non-overconfident managers in innovative industries because the manager will be likely to dive into the development of new products with less fear of failure.

Hirshleifer offers another insight on his research:

“Sometimes the best projects are also very risky. Managers who have a bureaucratic mentality of protecting themselves against blame are going to tend to avoid big risks, and will miss out on the big payoffs from success.”

The insurance industry is criticized, often unfairly, for its lack of innovation. Innovation may itself be overrated but if it is all that important, could it be that this industry needs more overconfident CEOs?

I don’t buy it. There are plenty of confident insurance leaders. Innovation often happens not because of but in spite of certain leaders. I’m pretty sure– scratch that, I am very confident– that this industry, or the world for that matter, does not need more impetuous and stubborn jerks as CEOs.

What do you think?

Topics InsurTech