However, greater innovative output of overconfident managers is achieved only in innovative industries. We also find evidence that overconfident CEOs are more effective at exploiting growth opportunities and translating them into firm value, especially within innovative industries. We find that overconfidence remains a strong and significant predictor of innovation even when we remove managers with short tenures at their firms, which suggests that the endogenous hiring of overconfident managers by innovative firms is not the main driver of our findings. The results of this study have a bearing on the usual presumption that overconfidence is undesirable. Business commentators often point to examples of headstrong, overconfident CEOs who made disastrous decisions.
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He and his team discovered that overconfident CEOs are more likely to achieve innovative success for research and development, and to advance successful patents. High risk, innovation and overconfident management make a fascinating equation, according to Professor Hirshleifer. But the overconfident CEO might be extremely talented," he says. The bottom line, according to the researchers: An overconfident CEO achieves greater innovation than non-overconfident managers in innovative industries because the manager will be likely to dive into the development of new products with less fear of failure.
Hirshleifer offers a few insights on his research: Q. Why would a firm hire an overconfident manager? Maybe by mistake, or because an overconfident manager may sometimes also be very talented. Our evidence suggests an additional reason: because overconfident managers are, on average, better innovators.
Furthermore, we find evidence that overconfident managers are more effective in converting growth opportunities into value. How is increasing investment in risky projects beneficial to shareholders? It could be good or bad. Sometimes the best projects are also very risky.
Managers who have a bureaucratic mentality of protecting themselves against blame are going to tend to avoid big risks, and will miss out on the big payoffs from success. In some businesses that may be all right, but in industries where innovation is crucial, this may not be the best for shareholders. In general, if managers are risk averse, shareholders can motivate them to take more risk using option compensation to expand the upside for the manager.
But another approach is to hire a manager who is overconfident, and therefore takes risks more readily. How do you define an innovative industry? In our study, an innovative industry is one where there are many patents.
Pharmaceuticals and high-tech companies are examples. There is evidence that overconfident CEOs are more effective at exploiting growth opportunities and translating them into firm value. Why is that and why only in innovative industries? Our surmise is that overconfident CEOs are more ready to take on risky projects that are very promising, but could also easily fail. Less confident CEOs may shy away from such projects, missing out on such growth opportunities.
Innovative industries tend to have more high risk growth opportunities, and more scope for CEOs to be overconfident about them. Clearly there is a positive side to CEO overconfidence. A manager who is too detached from reality may plunge his firm into doom through impetuosity or stubbornness.
Back in the late s, while running a company called NeXT Inc. While extremely innovative for its time, the NeXT Computer was not commercially successful. This illustrates how overconfidence, and being too far ahead of your customer, can prevent success. Posted by: danica on
Are Overconfident CEOs Better Innovators?
Are Overconfident CEOs Better Innovators