How does overconfidence affect decision-making? How does overconfidence hurt businesses?
In his book How the Mighty Fall, Jim Collins claims that one of the reasons why companies fail is because managers or workers are overconfident that the company can only go uphill. Companies should always be prepared for the worst, and believing otherwise will only hurt them.
Let’s look at how overconfidence bias in decision-making hurts companies.
Overconfidence in Business
When companies become successful, some fall into the trap of believing they can do no wrong and that success can only breed more success.
(Shortform note: The first phase might creep up on you because you may not realize that you’ve moved past confidence into arrogance. To check if you’re succumbing to overconfidence, ask yourself: Do I consult others before making a decision? Do I listen to customers? Do I have a large circle that gives me a comprehensive view of the company? Is there anyone who gives me dissenting opinions? If you answer “no” to any of these questions, then it’s time for a change. The first step is opening lines of communication: Empower employees to express their opinion by asking them what they think about their performance and the performance of the company. Also seek out customers’ views.)
In a business setting, overconfidence bias in decision-making manifests in two ways: Either a successful company arrogantly goes full speed ahead with ill-advised projects, or it takes its focus away from its successful core business because it’s distracted by shiny, new pursuits.
A Successful Company Becomes Arrogant
The first way overconfidence leads to decline is when a company becomes so arrogant that it believes it’s immune to failure and that anything it touches will turn to gold.
Collins gives the example of Motorola: A giant in the analog cellphone industry in the 1990s, the company poured its resources into developing the smallest analog cell phone in the world, just as digital technology was on the rise. Motorola brushed off the digital threat and tried to coerce wireless carriers into using mostly Motorola units. But the carriers refused to be bullied, and Motorola couldn’t stem the tide of the digital revolution. The company’s cellphone market share eventually suffered a huge drop.
(Shortform note: Collins uses Motorola as an example of an enduringly successful company in 1994’s Built to Last. However, by the time Collins worked on How the Mighty Fall, Motorola had fallen from its perch, and in 2011, the company was split into two: Motorola Mobility and Motorola Solutions. Motorola Mobility then changed hands a couple of times—first it was acquired by Google, then it was sold off to Chinese brand Lenovo (which still sells phones under the Motorola brand). As of 2023, Motorola appears to be making a comeback through Motorola Solutions, which has become a major player in the security industry.)
A Successful Company Loses Its Focus
The second way overconfidence harms companies is when they take their focus off what Collins calls their “flywheel”: the core business whose momentum keeps the company moving forward. Because the company may seek to expand their success to new ventures unrelated to their core business, they may pay little attention to what drives their success in the first place. When the company finds that success is hard to replicate in other fields, it may turn its attention back to the flywheel, which by then has become shaky from neglect.
According to Collins, one example of a company that lost its focus is Circuit City, a consumer electronics retailer that enjoyed impressive growth in the 1980s and ’90s. Collins argues that the company’s decline began when it turned its attention to building up other unrelated businesses, such as used car dealerships. In the process, its electronics superstores stagnated. Circuit City filed for bankruptcy in 2008.
Collins adds, however, that focusing on your flywheel doesn’t mean that your company shouldn’t innovate. Rather, it means building on what you’re good at. For example, if your company is successful at selling baked goods, you shouldn’t suddenly venture into manufacturing car parts. Instead, you might expand into baked goods for dogs, boxed mixes of your muffins, or kitchen equipment like cake pans and mixing bowls.
The only time you should consider completely pivoting away from your flywheel, says Collins, is when it’s bound to become obsolete in a few years or when it no longer excites you.
