2. The survey and the experiment
-Duke University
Estimation of returns for the following year by CFOs of large corporations
Conclusion: Correlation between the estimates and true value of short term
future od stock market was less than 0
Two other estimates: 90% sure of it being too high and 90% sure of it being
too low
The range in between is the 80% confidence interval
Values lying outside are called ”surprises”, which are expected to be 20%
Actual Result: 67% surprises
Conclusion: CFOs were grossly overconfident
Ideal saying by CFOs: 80% chance that S&P return in next year will be between
-10 and 30%
3. Overconfidence and Optimism in firms
CFOs who were overconfident and optimistic about the S&P index were
also the same about the prospects of their firm
They went on to take more risks than others
Providers of misleading information are more rewarded than the truth
tellers; Social and Economic pressures e.g. Physicians
Undesirable by people: Unbiased appreciation of uncertainty
Undesirable when stakes are high: Mere guessing
Solution: Act on pretended knowledge
4. Optimism
Benefit: Resilience in the face of setbacks
Drawbacks: Underestimates obstacles, acute case of competitor neglect
Takes credit for success, little blames for failures
Eg: Cold calling, scientists work
The Premortem: A Partial Remedy
By Gary Klein
Overconfident Optimism can be mitigated by Training
Eg: Judges were encouraged to consider competing hypothesis
Application in Organizations: When an important decision is made but not yet
implemented, ask the experts to think about a year ahead and that the
outcome was a disaster. Think about the reasons for the same
Advantages:
• Overcomes the groupthink which affects many teams
• Unleashes the imagination of knowledgeable individuals in much0needed
direction
