Since I heard Daniel Kahneman speak at the World Business Forum this year, I haven’t stopped thinking about one particular point he raised.
Kahneman is a Nobel Prize-winning psychologist and the author of the 2011 bestseller “Thinking, Fast and Slow,” in which he outlined a series of cognitive biases that affect our everyday decisions.
At WBF, Kahneman spoke about a “paradox” of success: You probably can’t be wildly successful unless you’re optimistic and overconfident about your chances. But generally speaking, optimism (the belief that you’re less likely than others to experience bad events and more likely to experience positive events) and overconfidence (an inflated sense of accuracy or ability in a specific area) are career saboteurs.
It’s the difference between, say, the Elon Musks and Jeff Bezoses of the world and the rest of us.
“To be optimistic on average — it’s not favorable,” Kahneman said. But “extreme success is impossible without optimism.”
Kahneman pointed to a 2007 paper published in the Journal of Behavioral Decision Making.
Researchers looked at a group of inventors in Canada and found that above-average optimists who were advised not to pursue their project ended up spending 166% more money than below-average optimists did when they received the same advice. (The researchers found that overconfidence didn’t have an effect on the inventors’ spending behavior, but that may have been because they didn’t specifically measure the inventors’ confidence in their abilities.)
Based on their findings, the researchers surmise that “a high level of optimism may act to keep inventors going in the face of adversity” — which is either a laudable or completely impractical behavior depending on your perspective.
As Kahneman described it, the average inventor would have been better off financially heeding the negative advice and taking a more traditional job; but the most successful inventors would not have.
In some circumstances, overconfidence can be beneficial
A more recent study provides some preliminary evidence that, at least among entrepreneurs, optimism can backfire.
The study, which was published in the journal European Economic Review, found that above-average optimists who are self-employed earn 30% less than below-average optimists who are self-employed. Interestingly, however, the study also found that optimists who work for companies earn more than their more pessimistic peers.
Still, there are some circumstances in which overconfidence in particular can work to your benefit. An article in the Harvard Business Review describes a study that found, at firms led by overconfident CEOs, there tends to be lower employee turnover and employees allocate a greater share of the assets in their retirement benefit plans to company stock.
The authors write in The Harvard Business Review, “At least in the corporate world, there may be a bright side to overconfidence: it can increase the commitment of other people to your venture.”
As for Kahneman, he called optimism the “engine of capitalism.” He said, “When you have lots of people trying things against the odds, it’s not very good for most of them. Most of them will fail. But it’s very good for society at large to have a lot of people competing and a few of them succeed.”
This article first appeared on Business Insider.