“What would I eliminate if I had a magic wand? Overconfidence,” stated the Nobel laureate Daniel Kahneman. In business it drives CEOs to take excessive risks, engage in value-destroying mergers, the low-paid to overly strive for bonuses, and key staff to dismiss feedback. But it’s not being eliminated anytime soon. As Kahneman explains, overconfidence “is built so deeply into the structure of the mind that you couldn’t change it without changing many other things.”

Since businesses and HR directors have to live with overconfident employees, it’s helpful to understand this trait in detail. Research shows that there are benefits, as well as costs to being overconfident. It impacts recruitment, teamwork, compensation, promotions, and gender issues. Overconfidence particularly affects the higher echelons of an organisation, including the c-suite and CEOs.

Let’s be clear: the output of overconfident people can be valuable to an organisation. They can drive innovation, especially during a period when many businesses across the globe are transforming. Risky ventures spearheaded by overconfident people can also pay off and reap rewards. Our own research has also demonstrated that more confident employees tend to work harder than less confident ones at tasks where effort and skill are complementary. So on many levels, contrary to what Kahneman argues, organizations can benefit from employees’ overconfidence.

So what are the traits of overconfident employees? Firstly, these individuals genuinely believe they are as good, if not better, than their colleagues at work. Then there is overconfidence with respect to absolute performance – such as establishing a new business or conducting a successful acquisition. There is also overconfidence with respect to relative performance – how an individual compares themselves to others in their team. Finally, there is overconfidence around the precision of one’s knowledge, which usually leads to overly precise forecasts and predictions.

Overconfidence also varies depending on the task at hand. People tend to be more confident when it comes to easy tasks and less confident about hard ones. At the same time, many in the work environment tend to assume that overconfident individuals are competent, when there is no actual relationship between these two qualities.

Overconfidence and effort provision

A lot of my research studies the effect of overconfidence on effort provision. An employee’s output typically depends on effort, as well as skill. If you overestimate your skills, where effort and skills are complementary, you will work harder, be more motivated and therefore be more successful. This positive effect of overconfidence on effort provision can also lead those who are less talented to compensate their lack of skill by working harder than their less confident colleagues.

In contrast, if you are overconfident where effort and skills are substitutes, then you will work less, be less motivated and be less successful. An example involves tasks where employees have to attain a certain quota and pay does not increase for performance above the pre-determined quota.

Overconfidence, promotions and compensation

Overconfident individuals overestimate their chances to win in what we refer to in our research as tournaments and contests. In the workplace, these competitive situations translate in scenarios such as competing for a bonus, a promotion or other staff rewards. They perceive themselves to be better than others and, when effort and skill are complementary, they will put more effort in than less confident individuals to win. Organisations can take advantage of this by changing the structure of compensation and incentives.

For instance, offering more compensation for winners and less for those who are runners-up is much more attractive to overconfident individuals because their confidence leads them to believe that they are more likely to win. This can be seen in advertising, sales or financial trading where base pay is low, commissions are high, and a lot of overconfident individuals are employed. It means organisations that deploy such systems can often get away with paying less, since only a few individuals win big in these situations.

In organisations or sectors where there are quotas to be reached, or situations where there is just a pass or fail evaluation when it comes to corporate endeavour, these conditions will not incentivise overconfident people to perform.

Dealing with an overconfident CEO

Research shows that many CEOs are overconfident. This is not helped by inflated salaries and bonus structures. Why? Because high levels of compensation at the top attract more confident people, whereas such pay packets are less attractive to less confident people. These individuals are also more aware that there is a low probability of achieving high rewards through high risk – and they are correct in this assumption. But overconfident top executives don’t see it this way, so they can overlook or ignore perceived risks.

Many overconfident CEOs also think that they’re very good at managing their organisations and better than the competition at doing so. This can lead to mistakes in decision making at the top such as relying too heavily on debt or engaging in value-destroying mergers. Still, research shows that if organisations have an overconfident CEO, this can help retain employees who are like-minded – because they also want to take risks and are motivated to do so. Hence, it is critical that board members closely monitor the behaviours and decisions of overconfident CEOs.

How to make teamwork work

Teamwork is increasingly important because of the complexity of organisations, the systems they are deploying and the sophistication of markets they’re operating in. More people are needed to achieve increasingly complicated goals. What happens when you have overconfident individuals in these teams? There are actual benefits, if managed properly.

HR directors should realise that in team tasks, where effort and skills are complementary, it is worth building teams containing confident and overconfident individuals. Our own research suggests that this can help reduce free riders and boost team revenue. But at the same time, these teams can overestimate the potential of their efforts – so be aware.

Equally, a team containing too many overconfident people might be too competitive or inclined to take too many risks. Even if very few individuals are overconfident, they can undermine the performance of other team members. So there is a fine balance to be struck when considering overconfidence and team composition.

An issue with promotions and gender

Men tend to be more overconfident than women and women tend to be more risk-averse than men. What’s more, it has been established in laboratory conditions that men tend to enter more competitions than women. To some extent these gender differences are part of the reason why there are many more male top executives than females in the US, UK, as well as in most European countries.

One of my recent studies shows that more confident individuals often put a lot of effort into the beginning of their careers (e.g. working long hours) because they think they’re better than they actually are. And because they overrate their own ability, they also overrate their chances of heading up a company. This excessive effort is a behavioural mistake, because they have a bias in their thinking. However, this might also be one reason why men are over-represented at the top. This effect will be particularly important for reaching CEO positions where high executive compensation makes competing for a CEO position an extremely attractive proposition for overconfident people.

The antithesis of this is that less confident employees don’t enter the race to head up a company since they know they will have to compete with a lot of overconfident males and believe their chances of winning are lower.

In conclusion, HR directors should be fully aware of overconfidence in the workplace. They should spot the individuals who show these traits, realizing that the interplay between talent, effort and self-belief is complex. Yet there are many benefits to understanding how it all works.

In conclusion, HR Directors who are fully aware of the issue of overconfidence in the workplace can spot the individuals who show these traits and capitalise on the many benefits of understanding how the complex interplay between talent, effort and self-belief works.