Most of us find it easier to believe someone who appears confident -- even certain -- of him- or herself. Thus, the huge followings of many cocky talking heads on radio and TV, even though their accuracy is questionable.
In fact, the markets -- in this case, the markets for influence and credibility -- push individuals to exhibit “overprecision,” or the excessive certainty that they have the right answer, according to Don Moore, a professor of organizational behavior and theory with Carnegie Mellon University who has studied the phenomenon. That's good news for pundits playing to their audiences or brokers recommending investments to their clients. It's not so good for financial executives who strive to honestly convey the uncertainties inherent in their forecasts.
Moore tested his theory in an experiment in which he paid volunteers to guess the weights of other people, using just their pictures. However, the “guessers” could solicit input from other volunteers, who would give their recommendations. The “advisors” also reviewed the pictures, and then offered their estimates of the person's weight, along with confidence levels for their estimates. For instance, one might say he or she was 100 percent sure the person weighed between 170 and 179 pounds, while another would hedge. He or she might be 60 percent certain the individual was between 170 and 179 pounds, 20 percent sure the person was between 160 and 169, and 20 percent sure the individual weighed between 180 and 189. The guessers in the experiment viewed the advisors' confidence levels, but not their weight estimates, before selecting advisors.
The two groups of guessers and advisors were paid differently for their participation in the study. Guessers were paid based on the accuracy of their estimates, while advisors were paid according to the number of guessers who chose their input.
As the experiment progressed, guessers would “display a preference for more confident advisors,” Moore and study co-author Joseph Radzevick, also at Carnegie Mellon, write. At the same time, the advisors' input became more precise over time. This occurs even though advisors, including both those in the study and those who offer analysis and predictions for a living, often are later shown to be wrong.
It would seem that the damage to their credibility from being wrong would negate any benefits, in terms of persuading others, they gained as a result of being confident. That's usually not the case, as the experiment showed. Moore and Radzevick offer several theories to explain our tendency to act less than rationally. First, by the time it's clear that things aren't going as planned, people may have forgotten who said what. “The evidence of (in)accuracy often shows up late -- years after the key decision, and after the people involved in the decision have moved on,” Moore says. Or, the experts may be able to explain the change in outcome as a result of mitigating circumstances.
Whatever their reasoning, consumers of information tend to more readily accept advice from those who express their views -- no matter how accurate -- more confidently. “Confidence makes you more persuasive,” Moore notes.
That can put financial executives between the proverbial rock and a hard place. On the one hand, they need to discuss their forecasts and recommendations with confidence. That's especially the case if others in the company are advocating action that the facts don't support and are ready to drown out anyone who brings this up.
On the other hand, all forecasts are based on assumptions, which can, of course, be far off the mark. So, expressing more precision than the facts actually warrant doesn't seem like the right way to go either. To be sure, some executives, like some pundits, can do quite well for themselves advocating courses of action -- say, a merger or new product launch -- that any reasonable analysis doesn't support. By the time the damage is done, those who made the call often have moved on, Moore notes.
Even so, true leadership requires putting the interests of the company ahead of one's ego or career. That means finding the balance between showing confidence in one's analysis without overstating the case. ###