A typical caricature of leaders is that they are full of confidence, with this bravado often exceeding their actual ability and results. Research from Cambridge Judge Business School explores whether this is actually the case or not.
The researchers suggest that the portrayal of bosses as full of themselves is largely inaccurate and usually extremely simplistic. What’s more, they feel that there is a need to distinguish between self-confidence based on a robust evaluation of one’s capabilities and hubris where the self-evaluation is off the mark.
Over the mark
“A tell-tale sign of whether a CEO has gone over the line between valuable confidence and dangerous overconfidence is when they start to disregard the feedback they are getting and pay less attention to what’s happening elsewhere in their industry,” the researchers explain.
The researchers examined something referred to as “core self-evaluation” (CSE), and whether CEOs are characterized by positive but realistic levels or whether they have inflated sense of self that is more rooted in narcissism.
“Whereas high CSE CEOs are attentive to their firm’s competitive environments and calculated in their risk-taking, CEOs with an inflated sense of self lead their organizations in pursuit of grandiose strategies with little regard for strategy-environment alignment,” the researchers explain.
They analyzed the personality and behaviors of over 100 CEOs from a range of publicly traded companies over a six-year period. They highlight that confidence is inevitable in CEOs, but the key is to ensure that the confidence is grounded in reality.
Risk-taking
The study focused on either risk-taking in terms of the allocation of resources or in terms of strategic nonconformity. The researchers then examine various hypotheses based on the companies selected. They also assessed the personality of each CEO based on interviews, speeches, letters to shareholders, and so on against an 11-item adjective-based personality measure.
The risk-taking of bosses was evaluated in a number of ways. For instance, resource allocation risk-taking was evaluated via a metric that included things like capital expenditure and R&D investment. Strategic nonconformity was measured on any deviation from industry-level means across six categories, including inventory levels, advertising intensity, R&D intensity, and financial leverage.
“One key finding of the study is that CEOs with high levels of self-assessment (or CSE) pursue risks in a differential fashion that depends on their particular market’s characteristics,” the researchers explain. “Put simply, the study found that CEOs with high levels of self-evaluations pursue risks more with the use of strategic resources in environments with a low concentration of firms (intense competition) and low dynamism (low uncertainty and instability).”
Nonconformity
The results also suggest that bosses with high levels of CSE are also more likely to pursue strategic nonconformity, with this especially likely in highly dynamic environments. By contrast, when these bosses operate in environments that are not dynamic, they’re more likely to follow the pack.
“Interestingly, the existence of a fast-growing market did not change the findings regarding high CSE CEOs on either risk taking or nonconformity,” the authors continue. “This could be because in situations where opportunities are abundant, broad strategic focus is important for identifying unique initiatives for a company.”
The authors believe that the findings will help bosses, and indeed their employers, stay on the right side of overconfidence. The ideal scenario is a boss who can listen, adjust, and adapt, rather than forcing their own way all the time.
