On Overconfident Leadership

Jul 18

How unchecked expertise leads to miscalibrated failure
Originally Published At Inman News, February 2012

“Overconfident professionals sincerely believe they have expertise, act as experts and look like experts. You will have to struggle to remind yourself that they may be in the grip of an illusion.”
Daniel Kahneman: ‘Don’t Blink! The Hazards Of Confidence’New York Times, 19th October 2011

As the web deepens its embrace of social media, and online behavior becomes increasingly informed by conversations inside of streams, instead of the passive browsing of page-centric destinations, our increased interactions with others is becoming a much larger part of how we experience being digitally connected. For marketers, this poses a new and unique set of problems, ones which force discussions around having a much stronger understanding of how people make decisions based on what their friends and other connections are doing, as opposed to messages they may absorb through what we used to call media. A deep, thorough and insightful understanding of how decision making is determined, how priorities are chosen, and ultimately how the emotional brain reacts to different stimuli, is becoming a much sought after arrow in the digital marketer’s quiver.

When we think of decision making, the idea of confidence is an important one. Confidence has long been a crutch advertisers have leant on in promoting their products (think of how beer or deodorizing products are promoted for example). Confidence as a topic, greatly informs how people make the kinds of decisions they do, as well as when and with whom. We’ve heard a lot recently about consumer confidence and it’s role in the economy’s recovery and stability. Confidence in local housing markets is something real estate professionals work on every day with their clients. But while confidence has traditionally been the bastion of proficiency in decision making, psychological research conducted into what happens when an abundance of confidence causes decision making to go very, very wrong, is important to explore for marketers looking to understand how online relationships work. What happens when people are so supremely skilled at their positions that they no longer see their own inability to make the right decisions? What are the consequences of such accidental behavior? The results are often catastrophic.

“The overconfidence effect is a well-established bias in which someone’s subjective confidence in their judgments is reliably greater than their objective accuracy, especially when confidence is relatively high.”
Gerry Pallier: ‘The Role Of Individual Differences In The Accuracy Of Confidence Judgements’The Journal Of General Psychology, 2002

The author Malcolm Gladwell, in a recent lecture at High Point University in North Carolina, explores such an idea — that of mistakes caused by people who are very good at their jobs. Mistakes made by people because they were good at their jobs, a symptom he calls ‘expert failure’. He suggests at length that just as with incompetence, there’s a greater degree of risk caused by accidents happening through an over-abundance of proficiency, and points to a growing trend whereby these kinds of phenomena will begin to occur more frequently as the world adopts more and more of a digital infrastructure.

Interestingly, Gladwell uses examples from the world of the military in order to explain the concept of failing through too much knowledge, specifically the Battle of Chancellorsville in May 1863, at the height of The Civil War. Often seen as one of Robert E. Lee’s greatest strategic victories, Gladwell illustrates what happens when over confidence takes hold through the story of Fightin’ Joe Hooker, the commander of the Union forces during the battle, and distinguished veteran of several previous Civil War battles, as well as gallant service during the Seminole and Mexican-American wars. Outnumbering Confederate troops by more than two to one, and surrounding them on three sides, the Union forces were poised to inflict one of the largest and most devastating defeats on the Confederate Army it had ever experienced, with the potential to prematurely end the war. Specifically through the innovative, and at the time highly technologically advanced method of using hot air balloons to gather intelligence about the enemy across the river, Hooker knew more about what Lee’s troops were doing than Lee himself. The evening before the battle was set to commence, Hooker famously addressed his troops and proudly boasted:

“I’ve got Robert E. Lee right where I want him, and even God himself cannot stop me from destroying him.”
Major General Joseph Hooker, April 29th 1863, Chancellorsville, Virginia

Gladwell describes Hooker’s comments as stemming from an over-abundance of confidence, fueled by too much information, something he calls ‘miscalibration’, a term used by psychologists to illustrate when someone’s perception of their ability to achieve a task far outranks their actual ability to do it. Hooker’s victory was by no means guaranteed, and underestimating one of the most feared and strategically brilliant generals of all time was simply not something he had considered. Hooker, surrounded by more information than he possibly needed, became so supremely confident of victory, that in his view ‘not even God himself’ was capable of preventing a Union rout of the Southern Army. Gladwell continues by saying that what actually happens is that more information doesn’t lead to better decision making, it simply leads to more confidence in those decisions you’re making.

Our decision making ability remains the same. Confidence instills hope, persistence, ambition and drive, but it doesn’t lead to specifically better judgments. In one of history’s greatest strokes of military strategy, Lee famously split his troops into three sections, fooling Hooker into thinking that they were in retreat. What really happened is that the Confederate troops began to circle around the rear of Hooker’s men, and surround them. When the rebel yell rang out across the fields with Lee’s troops emerging under cover of the nearby forests, they so surprised the relaxing Union troops that they immediately fled in retreat, and were driven back several miles. Hooker was later relieved of his command prior to the Battle of Gettysburg, where he was famously replaced by General George Meade.

“Confidence is what you have before you understand the problem.”
Woody Allen, Quoted In ‘On Overconfidence’

As this repeats itself throughout history (Napoleon at Waterloo or Chelmsford at Isandlwana etc.) it poses an interesting question for those buying into the idea that the more information we give to each other, or in the real estate industry’s case, our clients, the more informed and more astute our decision making will be. What are the consequences in the belief of perfect information? Gladwell proposes that as we obtain more information about a topic, our judgment suffers, but our confidence improves. In doing this, he uses the studies performed in the 1960's by psychologist Stuart Oskamp which found that supplying more information to a person about a topic does very little to improve their capacity to make better decisions. In fact, the accuracy of that decision making doesn’t improve as more information becomes available at all. But, as we’ve mentioned before, the specific confidence in the decision making has a marked improvement as more information is released. So what’s happening, especially in the field of online real estate marketing, is that there’s a tremendous over-estimation in the value of information distribution. More information increases consumer confidence (as we see from large syndication portals such as Zillow and Trulia, who trade on comprehensive data sharing — all the listings, market reports, housing estimates, detailed mapping and much more), but it doesn’t lead to a change in consumer decision making — this is perhaps best illustrated by the average time the prospective homebuyer is performing research online, prior to reaching out to an agent continuing to lengthen each year based on the economic climate. So what’s happening, through a strategic distribution of as much housing content as we can share as an industry, and under the guise of transparency, is more and more confident consumers.Not a bad thing, perhaps. Not necessarily better decision makers, but certainly those more assured of the decisions they’re making. I believe this is a key factor in why ill-informed and underperforming agents will continue to be disintermediated from the home buying process — consumers are becoming better and more confident agents than agents themselves.

This notion of the confidence in the accuracy of one’s judgment, based on the abundance of available information, leads to the concept of what psychologists refer to as miscalibration. This specifically means how good you are versus how good you think you are. This is what Fightin’ Joe Hooker suffered from at Chancellorsville, and also what Gladwell proposes was a key component of the decision making leading up to the recent financial crisis. Miscalibration is the idea that overconfidence leads to catastrophic decisions made by people who know too much. This is the opposite of poor decisions made by the incompetent, who are rarely elevated to positions of responsibility. Interestingly enough, Gladwell concludes by suggesting that we are profoundly conflicted by overconfidence, as reassurance, and faith in an expert’s ability to ‘see the job though’ is a key factor in the purchase and investment in the service of others. Many in the real estate industry confuse customer service with confidence and faith. It’s why Hooker’s speech the night before the battle was so well received, just as it’s the same reason you want the doctor to tell you everything’s going to be OK, or the real estate professional to call you back immediately and assure you they’re doing everything they can to solve your problem. But what comes with that reassurance and faith isn’t necessarily the same thing as good decision making, and that’s the conflict Gladwell proposes we have issue with at scale. Hooker wasn’t assured his victory, just as the doctor cannot guarantee a recovery.

“Overconfidence has been called the most “pervasive and potentially catastrophic” of all the cognitive biases to which human beings fall victim. It has been blamed for lawsuits, strikes, wars, and stock market bubbles and crashes.”
Scott Plous: ‘The Psychology Of Judgment And Decision Making’

Arnold Kling, in his essay ‘The Era of Expert Failure’ expands on Gladwell’s initial discussion, by suggesting that experts did nothing to avert the current financial crisis, economic downturn, or crumbling industrial infrastructure. He proposes that the express idea of decentralized knowledge as a way of counteracting the decision making of experts is at least one way to circumvent the problems of miscalibration. Kling argues that societies (like the web) where knowledge is decentralized make decisions faster and more accurately, and that over-confidence exerted by its leaders becomes frequently held in check, a good thing. As a result, centralized power and decision-making is becoming increasingly anomalous. While it’s true that we need to put faith in experts in order to remain stable as a community, those same experts are often unelected, but have increasingly strong advisory influence over those who do hold positions of official responsibility. Similarly, expertise in the real estate industry is constrained by market competition and checked by consumer choice (they can choose whomever they wish to work with). We can all choose, just like everybody else, to ignore the expert. Oskamp’s previous research reinforces that this has little impact on the decisions you’re making anyway. Interestingly, Kling goes on to explain how people create what he terms ‘organizational capital’, which has the result of making businesses more effective at decision making. Group decision making (just like the popular trend of group purchasing, or collective buying power), while often diluting original ideas, keeps miscalibrated individuals in check, and stop larger scale problems from happening.

Carnegie Mellon University researcher Don Moore explores Kling’s ideas further by performing studies which showed that people prefer information from a confident source rather than an honest or genuinely more knowledgeable one. We want faith in our sources of information, even if it’s at the expense of getting the right information. We want to be reassured and feel good about the information we’ve asked for, perhaps reinforcing something we had previously thought, which now might be confirmed by the data. Moore goes into some depth regarding the dangers of overconfidence, saying that once a topic has been mastered, we fail to be able to spot signs of what might go wrong any more. While overconfidence is driven by a reliance on more information, we no longer have the ability to make accurate predictions, or control those same random environments surrounding them. Those that have the belief that they are ‘bigger and stronger’ than others are severely miscalibrated. Too big to fail perhaps.

While it’s true that fast decision making is perceived as a strength in the modern era, it’s not immune from doubt.

“Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable. … An individual who expresses high confidence probably has a good story, which may or may not be true.”
Daniel Kahneman: ‘Don’t Blink! The Hazards Of Confidence’

In his wonderful editorial for The New York Times entitled ‘The Hazards Of Confidence’ Daniel Kahneman takes the financial industry to task on the theme of expert failure, outlining how the strategic placement of investments is little more than a game of chance, with, for example, at least two out of every three mutual funds underperforming the overall market in any given year. He suggests that as a consequence, the financial industry is wrought with inconsistent underperformance, for which is is still not held to account and ironically, consistently continues to reward itself for. Kahneman proposes that the investment industry’s performance should be perceived as follows:

“The illusion of skill is not only an individual aberration, it is deeply ingrained in the culture of the (investment) industry.”
Daniel Kahneman: ‘Don’t Blink! The Hazards Of Confidence’

In unravelling how investments in mutual funds specifically perform over time, Kahneman challenges the idea that if the facts go against your basic assumptions and previous legacy of decision making, you simply fail to absorb them. So much so, that if your success is entirely predicated on chance, with luck being rewarded, how much credit or compensation are you actually entitled to? This is where the problems of experts truly come into play — they confuse (and we in turn as the recipients of their messaging) confidence with expertise. The two things are similar, but mutually exclusive items. While it’s true that confidence is essential for mundane activities, to the extent that we now take it for granted, it can often be described as being fire-like in substance. Useful in controlled amounts, but with the capacity to swiftly burn out of control when left unchecked. Historians often blame military fiascos such as Chancellorsville or Isandlwana on overconfidence, but we’re simply placing more and more emphasis on it, as technology takes hold in our lives.

The practice of real estate professionals is at the heart of this discussion, especially in a climate where their expertise is in question from syndication sites preaching greater consumer transparency. The role of the expert is one that’s shifting more towards the consumer, at scale, than ever before, and we can become masters of very niche information at the touch of an app. No longer do we need to debate and discuss topics over who’s right at dinner, when we can simply Google the answer immediately. No longer do we need to have years of experience of a particular neighborhood when an app tells us what’s within a five block radius at all times. And no longer can we hold on to the idea that the consumer knows less than we do about the real estate process. Potential home buying consumers are becoming more confident as the window of time prior to contacting an agent increases annually, so much so that we as an industry run the risk of severe consumer miscalibration and potentially catastrophic decision making at our own hands, should the efforts of increased digital transparency go unchecked.

Overconfidence is sometimes described as happening when ‘people are blind to their own blindness’ While confidence is a critical aspect of restoring the housing market, more information does not lead to better decision making. People will continue to make the decisions they were going to make anyway, but increasing the flow of information will increase the confidence they have in those same decisions. But keep in mind that too much information, under the guise of unchecked transparency and disclosure, can often lead to miscalibration, wherein the consumer runs the risk of making the wrong decision.

Gladwell refers to this phenomenon as ‘expert failure’.

I hope it’s something you keep in mind the next time you’re sending out your market insight reports.

Further Reading:

Peter Aldhous: ‘Humans Prefer Cockiness to Expertise’

Itzhak Ben-David, John R. Graham & Campbell R. Harvey: ‘Managerial Miscalibration’

James Fowler & Dominic Johnson: ‘On Overconfidence’

Malcolm Gladwell: High Point University Keynote

Malcolm Gladwell: In Conversation With Nido Qubein, High Point University

Mike Griffiths: ‘Agile As A Solution For ‘Miscalibration Errors’

Daniel Kahneman: ‘Don’t Blink! The Hazards Of Confidence’

Arnold Kling: ‘The Era Of Expert Failure’

Stuart Oskamp: ‘Attitudes And Opinions’