The overconfidence effect

‘Get confident, stupid!’

It can be truly amazing to trundle around central Brisbane and listen to all the tooting of horns and hollering of friendly advice between motorists.

It’s almost as if everyone up here was born with an inherently consummate driving skill, and apparently nobody has navigational ability below the level of masterly.

At least that’s what people seem to believe, though the frequent prangs & collisions around the top of Brunswick Street & the Valley seem to suggest a different story.

The Goldilocks zone

We all suffer from flawed behavioural traits, but the propensity for overconfidence and the illusion of control might be one of the most treacherous of all, for the higher the level of overconfidence runs the more dramatically mistakes can be punished, leading to potentially catastrophic outcomes.

Familiarity does indeed breed confidence, but human nature makes us prone to errors & a dizzying list of cognitive biases, which can be a menacing combination.

A certain level of confidence is surely a good thing, for without it we’d never ask anyone on a date (with or without Dutch courage), ask a boss for a payrise (ditto), or start a business (normally best done sober), while the proverbial bar for success would consistently be set too low.

On the other hand we all know of insufferably overconfident people, which is far from a pleasant character trait.

Confidence can be a useful attribute up to a point, but can also increase the risk of an eventual comeuppance if it runs too high.

Treading a confident path

Far from being the path to mediocrity, the middle road for confidence is the Goldilocks zone, so here are 4 considerations:

(i) Never stop learning – a truism, but probably the single most important way to counteract overconfidence;

(ii) Be wary in new pastures – one of the most common traps, especially for business owners & investors, is feeling more confident after an early success. Remember there are winter & summer seasons;

(iii) Think fast and slow – the Dunning-Kruger effect holds that decisions made on impulse can be the most prone to cognitive biases. Think slowly, then act quickly…and always remember to ask yourself ‘what if I’m wrong?’; and

(iv) Know when to go all inwinning big once is a powerful goal, and there is a time to place big bets. Look for asymmetric payoffs.

Tempting though it can be, try not to dismiss other people’s perspectives out of hand.

Be humble, and expect to make mistakes – your long term results will be better for it.

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