Our next psychological tool relates to a concept called overconfidence. And a simple statement of overconfidence is that you and I are overconfident that our judgments are correct. Let me give you an overconfidence test and this is the nature of the test. I'm going to give you ten questions. Here's an example, the, the first question. The year in which Wolfgang Amadeus Mozart was born. And I want you to pick a range from X year to Y year so that you're 90% confident that the correct answer falls within the range. Now why do I say 90%? Well if I said 100%, that would be too easy, because then with every problem you could say from zero to a billion and probably answer every question correctly. And so I want you to be 90% confident. That's going to force you to be a little more precise with your answers. So to be successful with this ten part quiz, you will answer nine out of the ten questions correctly. So get your pencil and paper ready and you can start with this first question. What's a range of years so that you're 90% confident that Mozart's year of birth falls within that range? Okay, question two, the length of the Nile River. The length of the Nile River. Again write down a range so you're 90% confident that the correct answer falls within the range. You can use miles or kilometers. Question three, the number of times lightning strikes the earth every minute. Range so you're 90% confident the correct answer falls within the range. The time it takes sunlight to reach the earth in seconds. The time it takes sunlight to reach the earth in seconds. The diameter of the moon. And here again, feel free to use miles or kilometers. And by that I mean a full moon. Okay, the number of knives, forks and spoons in the White House. The number of actively spoken languages in the world. Again, not the specific number, but the range. Actively spoken languages in the world. The gestation period, that is the length of pregnancy, in days, of an Asian elephant. The number of conceptions, the number of pregnancies, that take place every day over the world. And finally, the length of time a snail can sleep if it is not disturbed, in days. If you don't have snails in your country, you may have seen pictures of them. They're little wormy-like creatures that carry their shell on their back. How long can they sleep in days if not disturbed? Okay. So let's see how you did. Remember, to successfully complete this exercise you will have answered nine out of ten of the questions correctly. Okay? So, Mozart was born in 1756. The Nile River 4,187 miles or 6,738 kilometers. The number of times lightning strikes the Earth per minute, 6,000. It takes sunlight 492 seconds, or eight minutes 12 seconds to reach the Earth. The diameter of the moon is 2,160 miles. There are 13,092 knives, forks and spoons in the White House. 6,000 actively spoken languages in the world. The gestation period, the length of pregnancy of an Asian elephant is 645 days. The number of pregnancies, that's human pregnancies, not Asian elephant pregnancies that occur daily throughout the world is 365,000. And a snail can sleep if it is not disturbed 1,095 days. So again, you were successful if you answered nine out of ten correctly. When I do this in class it's very rare for anyone to answer nine out of ten of these questions correctly and that's because most of us are overconfident. That's the bad news. Most of us are overconfident. We choose ranges that are too narrow when we're faced with uncertainty such as these questions. The good news is that virtually the only people who are not overconfident are clinically depressed. Now, overconfidence is something that is studied in a variety of disciplines. Finance professors in business schools love to study overconfidence, because they relate it to trading in the stock market. And I think their basic conclusion is that because of overconfidence, people trade too much. And because of the over-trading and transaction costs, they basically lose more money than they should. Accounting professors love to study overconfidence. They look at for instance, earnings projections by managers. And managers who are successful in making short term earnings projections are often bad at making long term projections because of the overconfidence that developed. And it relates to negotiation. I see this in the negotiations conducted by my students where, when they do the negotiation analysis, and they try to predict what the ZOPA is, the Zone Of Potential Agreement. Too often they predict zones that are too narrow, which then limits their ability to reach an agreement and be creative in coming up with a solution that satisfies both sides. So overconfidence pops up in a lot of different venues. Occasionally, especially when I'm teaching executives, I get this question. Well isn't overconfidence really a good thing? Isn't that a good thing for a manager to be supremely confident so that he or she can persuade the staff to do more than they ever thought was possible? For instance, you see this kind of a statement in various readings. This happens to relate to entrepreneurs. Overconfidence by entrepreneurs may provide the vision necessary to convince potential hires and investors of the opportunity to get in on the ground floor of a growing startup. Optimism also leads founders to see the best in people and thus contribute to their social skills. So what's right? Is overconfidence a psychological problem, or is it something that's positive? Well, I, I think that it's both, but I, you, I think you also need to put it into context. When you're talking about decision making, that's when overconfidence is a problem. That's when you want to be a realist. That's when you want to search for disconfirming evidence. However, once you've made the decision and you're implementing the decision, then you can put on your optimist hat and try to persuade people to do more than they thought possible. The challenge in decision making is it especially relates to searching for disconfirming evidence that challenges your thinking. We all fall into the trap of trying to find confirming evidence. So let, let me try this experiment with you. I'm thinking of three numbers, two, four and six. This is a sequence of numbers and I have a rule in my head that I used in developing this sequence. And I want you to try to guess what rule is in my head. So, think about this for a second. And if you were in class, I would allow you to add three numbers to this to test your theory. So you could add three numbers to my sequence. Now what, what happens in class when students volunteer is that, let's say a student thinks that my rules is, the numbers increase by two. So, the students will add three numbers. They'll say two, four six, okay, eight, ten, twelve. And then I'll tell them, that's not, that's not my rule. Other students might say, well you're adding the prior two numbers. So, two plus four is six, six plus four is ten would be the next number. Ten plus six is 16 would be the next number. 16 plus ten would be 26 would be the next number. So they give me those number because they think that's the rule. And I say no, that's not my rule. Now my rule is actually very simple. My rule is simply the numbers increase in value. But notice what the students do. When they come up with an idea of what they think is the rule, do they test it with evidence that confirms their rule or disconfirms their rule? They select evidence that confirms the rule. So, the person who thought the numbers increase by two selected as the test eight, ten and twelve. And I said, well, yes, that meets my rule. But I mean it, it, it does meet my rule, but then they make the wrong guess as to what the rule is when they think it increases by two. What they should do is to select disconfirming evidence. That student should have selected for example, seven, eight, and nine. When the numbers did not increase by two, but still met my rule. If they'd done that then they would know that their guess was wrong. So, it's very difficult for the human mind to focus on disconfirming evidence. We automatically gravitate toward confirming evidence. But yet, I think, I think we need more studies on this. But many great leaders are the ones who are surrounded by people who challenge their thinking and test their thinking, rather than people who simply agree with whatever the leader proposes. So that concludes our look at overconfidence.
