When your CEO promises outlandish goals to the moon and back, their overconfidence shows their commitment to the company at all costs. Just look at billionaire Elon Musk’s all-or-nothing salary as a recent example. Musk must make sure that Tesla grows in $50 billion leaps, or else he will earn no salary.
CEOs that do these risky grand proclamations are signaling that they are all-in. They do this to show their belief in the company so that we begin to believe in it too. Do we buy it? Apparently so. Confidence is infectious. A new study on CEO overconfidence found that employees and stakeholders begin to internalize the CEO’s commitment to the company as their own.
Overconfident CEOs cause ‘reality distortion field’
When a CEO has a singular vision of what a company can do, it can distort reality as we see it. Suddenly, impossible deadlines seem doable. Looking at corporate leadership at over 1,900 U.S. companies over the past two decades, the researchers defined overconfidence as the risky personal loss of wealth. Overconfident CEOs were ones that risked losing it all if stock prices suddenly fell. When the CEO showed this kind of commitment, it increased others’ too. Employees became more likely to stay at the company and take more stock in it. Overconfident CEOs were able to inspire longer relationships with stakeholders.
“Overconfident CEOs induce more supplier commitments including greater relationship-specific investment and longer relationship duration,” the study found. “Overconfident CEOs also induce stronger labor commitments as employees exhibit lower turnover rates and greater ownership of company stock in benefit plans.”
At best, with this excessive optimism, you get a Steve Jobs situation. The late Apple CEO was famous for overpromising and willing his vision of a pocket-sized smartphone into being.
“Steve Jobs was known for having a ‘reality distortion field’ — such confidence in his ideas and unrealistic timelines that he was able to sell them to employees, suppliers, and investors. Our research suggests that the reality distortion field is real,” the researchers conclude.
At worst, you get the hubris that allowed Theranos CEO Elizabeth Holmes to succeed
Holmes is a famous cautionary tale in Silicon Valley. Her overconfidence in her ability to revolutionize healthcare with pinprick blood tests reportedly turned into bold-faced lies to investors and patients about if the blood tests actually worked, as outlined in the book on her downfall, Bad Blood: Secrets and Lies in a Silicon Valley Startup. This past week, Holmes was indicted on charges of conspiracy and wire fraud, accused of knowingly deceiving investors, doctors, and patients.
So yes, overconfident CEOs have the ability to bend reality to their will, exaggerating and embellishing on the details to get their way. But when the core truth of a business model gets exposed as a lie, the CEO’s reality distortion field stops working and the CEO falls back down to the humbling ground of Earth.