Bosses with exaggerated belief in their abilities assess their company’s financial situation more optimistically than their colleagues and are much less responsive to external and internal feedback. This can stand in the way of rational decisions, researchers from the Vienna University of Economics and Business report in the “Strategic Management Journal”. The scientists speak of “toxic self-confidence”.
For their study, the scientists led by Christian Schumacher from the Institute for International Business at WU Vienna examined more than 800 companies from the S&P 1500 Index, which includes the 1,500 largest listed US companies, between 1992 and 2014. Specifically, they shed light on the role of CEOs’ personality in evaluating the financial position of their company in comparison to other market participants in the same industry or in previous financial years.
Devastating consequences for companies
The question is how the bosses deal with this comparison, i.e. the positive or negative feedback on their current financial situation. “We wanted to know how the self-confidence or exaggerated self-confidence of the CEOs affects their interpretation of the results,” said Schumacher in a press release. In the scientific literature, this personality trait is considered to be a decisive factor for leaders. The scientists assessed the CEOs’ self-confidence based on descriptions in the media and on personal investments, i.e. how many company shares he holds of the company he manages.
The analysis showed that overly confident CEOs are more optimistic about their financial situation than their colleagues and are therefore much less sensitive to external and internal feedback. “That means: Although the financial situation in the company may be very bad and would require a change in the company strategy, these CEOs interpret the precarious situation much more positively and only react with a change much later – which can of course have devastating consequences for the company” , says Schumacher.
Women are more responsive to feedback
In addition, the researchers conclude that female CEOs generally have a less distorted perception of the financial situation and thus react more strongly to feedback. “Women are less often overconfident about their own abilities, which is also reflected in our study,” said Schumacher. This would make women react much more to feedback. (apa)