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Managing Overconfidence

This document discusses managing overconfidence and the importance of metaknowledge. It defines metaknowledge as understanding the limits of one's own knowledge. Overconfidence can lead to costly mistakes for businesses and inaccurate beliefs. Developing good metaknowledge through feedback and accountability is essential to recognize when one's beliefs may be distorted and how to better understand what is and isn't known. The document outlines various cognitive and psychological causes of overconfidence and remedies to address it such as accelerated feedback and considering alternative viewpoints.

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Jonathan Jansen
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132 views2 pages

Managing Overconfidence

This document discusses managing overconfidence and the importance of metaknowledge. It defines metaknowledge as understanding the limits of one's own knowledge. Overconfidence can lead to costly mistakes for businesses and inaccurate beliefs. Developing good metaknowledge through feedback and accountability is essential to recognize when one's beliefs may be distorted and how to better understand what is and isn't known. The document outlines various cognitive and psychological causes of overconfidence and remedies to address it such as accelerated feedback and considering alternative viewpoints.

Uploaded by

Jonathan Jansen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Managing over-confidence – Russo and Schoemaker

Good decisions require more than knowledge of facts, concepts and relationships: metaknowledge
Metaknowledge: understanding of the limits of our knowledge
- Not rewarded in practice  over-confidence remains hidden flaw in managerial decision-making

“To know that we know what we know and that we do not know what we do not, is true knowledge”

Consequences of unsupportable confidence continues to plague businesses:


- Shell’s young geologists too confidently predicted presence of oil, costing the company millions

We do not have to favour a position now to reserve the right to hold a future position
People are often unjustifiably certain of their beliefs.

Confidence range quiz: formulate 90% confidence range about something you’re not 100% sure.
 People often overstate the accuracy of their estimates, this test measures metaknowledge

Managers should recognize that most people’s beliefs are distorted by deep-seated overconfidence.
When we understand its nature and causes, we can devise plans for controlling it.

Metaknowledge concerns a higher level of expertise: understanding the nature, scope, and limits of
our primary knowledge  sometimes more important than primary knowledge:
- Metaknowledge: knowing when to see a doctor
- Primary knowledge: knowledge on medicine
 When we appreciate the limits of our knowledge, we can acquire more/better information

If you know a lot on a subject, your 90% confidence interval will be narrow. If you don’t know a lot,
your 90% confidence should be wide. Your subjective 90% confidence intervals should, by definition,
capture the true answers 90% of the time. You are responsible for knowing what you don’t know.

Developing good metaknowledge: essential elements: feedback and accountability

Feedback: accurate, timely, tells us how inaccurate our estimations were.


Accountability: forces us to confront feedback, recalibrate perceptions, temper opinions accordingly

“Experience is inevitable, learning is not”  develop calibration power through systemic feedback

Causes of overconfidence:
- Availability: we fail to envision important possible outcomes and base our prediction on few
- Anchoring anchor one idea and not adjust away rom it sufficiently, despite new information
- Confirmation bias: we seek support for our initial view, rather disconfirming evidence
- Hindsight: we believe the world is more predictable than it really is when looking back

Cognitive remedies to overconfidence:


- Accelerated feedback: trains people to estimate their confidence in their knowledge (Shell)
- Counter argumentation: think of serious reasons to why your initial beliefs might be wrong
- Paths to trouble: Fault Tree: diagram to identify specific future possible problems and causes
- Paths to the future: explicit scenario analysis considers conjunction of individual problems
- Awareness alone: general / specific awareness of overconfidence and finding a solution to it

Psychological causes to overconfidence: euphoria from feeling personal or professional success

Group judgments are better as they consider different points of view and stances

Motivational factors in overconfidence:


- Optimism has motivational value
- Confidence is associated with competence

Managers should: be realistic in what you know and don’t know.


Fault tree diagram

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