Look on the Bright Side: Optimism Can Boost Your Performance

By Melissa J. Anderson (New York City)

By now, you’ve probably heard about how women are more risk averse than men, and this could be one reason why firms with more women decision makers do better in turbulent business environments. In fact, the idea that the overconfidence bubbling up from a culture of testosterone-drenched male traders was the root-cause of the 2009 economic meltdown was popularized by the New York Magazine article “What If Women Ran Wall Street.”

Women tend to be more conservative than men in how they approach risk, writes author Sheelah Kolhatkar. This can result in more stable, rational decision making. Rather than making ego-based trades driven by showy overconfidence, women traders tend to operate on a more even keel. This rationality is a generalized characteristic of women that is viewed as an asset in any industry.

Nevertheless, women still receive mixed messages about confidence. We praise women for taking a conservative approach to business risk, while at the same time, we encourage women to take more career risks, by talking up their achievements, asking for stretch assignments, and taking on more of the P&L roles that test their mettle.

How much confidence is too much confidence? When is the right time to feel good about your chances, and predict your own success? What is that illusive sweet spot?

A new INSEAD study purports to show that being optimistic about one’s work can actually boost performance. But in doing so, the authors also make an important distinction between optimism, confidence, and overconfidence that may help sort out some of the contradictions women face when it comes to taking risks.

Confidence and Optimism

According to the authors of the working paper “The Bright Side of Managerial Overoptimism,” there is a distinct difference between optimism and confidence, and the two lead to different outcomes. Gilles Hilary, INSEAD; Charles Hsu, Hong Kong University of Science and Technology; and Benjamin Sega, INSEAD explain that optimism means anticipating positive external events, while confidence means having a positive believe in one’s own talent or skill.

They continue, “Over-optimism involves an excessive belief that future events will be positive, while overconfidence involves placing too much weight on the accuracy of private information and an excessive belief in one’s own skills.”

There is plenty of research showing that overconfidence has negative outcomes – for example, see the research cited in Kolhatkar’s New York Magazine article. But that’s not to say that confidence in itself is a bad thing. Being sure of yourself is important in getting ahead – it’s being excessively sure that leads to problems.

That leaves optimism and over-optimism. According to the research, having a sunny outlook can actually boost your performance as a manager. And producing high quality results has lots to do with well-deserved confidence and the willingness to take risks.

Optimism and Productivity

The researchers analyzed managerial forecasts of firm quarterly earnings between 1998 and 2008 and found that over-optimism, unlike overconfidence, results in better performance. They write:

“Human inference and estimation is subject to systematic biases. In particular, there is a long literature showing that overconfidence due to cognitive biases can lead to sub-optimal decisions. We depart from this research by showing empirically that a) optimism is a related but different bias, b) it can emerge dynamically in a rational framework rather than because of cognitive biases, and c) it can improve firm’s welfare.”

Based on numerous dissections of the data, they find that, first of all, managers of firms that have a successful quarter tend to forecast more positive outcomes down the road – forecasts that are more positive than they would be otherwise.

But more interestingly, the authors explain, releasing these overly optimistic forecasts pushes managers to work harder to achieve them. They write, “Importantly, we also find that managers appear to exert greater effort to meet their over-optimistic forecasts: contemporaneous performance increases as the number of recent prior successes rises. This is true for both ROA and market returns.”

That optimism boosts performance well into the future. “In addition, future ROA performance over the next four quarters is also positively affected, suggesting that the effect is persistent, at least over the mid-term.”

While overconfidence can be damaging to a firm (and your career), over-optimism (that is, faith that external events will work out to your benefit) can boost performance. When in doubt, look on the bright side – a positive outlook could actually push you forward and produce real results.