Top managers are usually blessed with a strong sense of self-confidence, which can quickly turn into megalomania. A prime example is Elon Musk. Does this harm companies, or is overconfidence actually an advantage?
She is the textbook con artist par excellence: Elizabeth Holmes. The former head of the startup Theranos bilked hundreds of millions of dollars from investors using fake blood tests. Her company was once worth an estimated $9 billion. Investors believed in Theranos’ potential to revolutionize healthcare, according to Holmes.
The young founder was celebrated as a genius, a female Steve Jobs. Like him, Holmes liked to appear in a black turtleneck, and she trained herself to have a deeper voice. In 2015, she became the youngest billionaire to make it onto the Forbes list. But shortly afterwards it became clear that the rapid blood test, which supposedly could detect 240 diseases, was largely ineffective and Holmes knew it. Theranos had to cease operations in 2018. Holmes, who had denied the fraud allegations until recently, was sentenced to over 11 years in prison in 2022.
Legendary rise and fall of Bankman-Fried
Sam Bankman-Fried, the former head of the now insolvent crypto exchange FTX, was once hailed as a crypto guru. A New York court has now found him guilty of billions in fraud and money laundering. Bankman-Fried faces a long prison sentence.
Similar to Holmes, there are legends surrounding Bankman-Fried that helped shape his rise. He is said to have passed the time playing online games during a telephone meeting with the legendary investors from Sequoia Capital. After all, it was a financing round of $1 billion.
Bankman-Fried was the darling of the crypto scene. Tousled hair, T-shirts and shorts were his trademarks. In public, he liked to appear as an altruist who promised to donate most of his fortune to charities. There are many indications that this was a facade. The 31-year-old is said to have embezzled $8 billion in customer money in order to speculate and finance a lavish lifestyle.
These are extreme examples. But to what extent are imposture and pronounced self-promotion part of the job profile of company bosses? A good sense of self-confidence is undoubtedly an advantage: after all, it is your job to convince customers, shareholders and investors of the company strategy as well as your own products and services. It is important to motivate and inspire employees. At the same time, CEOs often make decisions with far-reaching consequences. Self-doubt has no place here.
“Managers are expected to bluff sometimes”
The sociologist Sonja Veelen from the Philipps University of Marburg got to the bottom of the phenomenon of imposture in research papers and books*. The researcher leaves it open whether it occurs particularly often in management levels. For Veelen, however, it is obvious that managers are often expected to bluff sometimes or to be able to present things differently and better than they actually are.
According to Veelen, impostors have very different types and characters. What is characteristic, however, is that it is rarely immediately obvious that they are playing the wrong game. Many seemed friendly, likeable, approachable – and that was precisely what led them astray. It is no coincidence that both Bankman-Fried and Holmes have captivated many people. They knew how to perform well, how to wrap their counterparts around their fingers, how to build a fan base and keep them happy. At the same time, the desire to share in the success of the impostors may have significantly clouded the judgment of many deceived investors.
It’s obvious why they stack up high. It provides individuals with higher status, recognition, power, prestige, or personal freedoms and privileges. The boundaries between good self-marketing and imposture are fluid. “They vary depending on the context and always occur where the socially accepted level of exaggerated, dishonest self-portrayal ends,” says Veelen. The limit is clearly crossed when it becomes criminal, for example when forged documents, certificates or attestations come into play.
People who overestimate themselves are confident in their abilities
Impostion also happens consciously with the intention of deceiving. If, on the other hand, someone exaggerates in the belief that they are accurately describing their abilities and talents, this is not called imposture, but rather overestimation of oneself. And in fact, people who overestimate themselves are confident in their own abilities and actions.
This is confirmed by research work by Peter Schwardmann, assistant professor at Carnegie Mellon University in the USA, who has analyzed the causes and consequences of “overconfidence” in various studies. Experiments in debating clubs proved to be particularly informative: in such competitions, participants only know which point of view on a topic they have to represent 15 minutes before the debate. Whether you take the pro or con position is a matter of chance.
After 15 minutes of preparation, Schwardmann and his team now confronted the participants with assessments and facts that either supported the position being taken or that of the opponent, and they already noticed a clear polarization: the respondents were more likely to believe the facts that reinforced the point of view, which they had to defend. And according to the behavioral scientist, they are already convinced after a short time that they have the better arguments on their side.
We lie to ourselves to convince others
“If we have incentives to convince others of something, we also convince ourselves of it,” explains Schwardmann. “And sometimes we lie to ourselves because it makes it easier for us to convince others.”
An experiment with test subjects who had to take part in a job interview also shows that increased self-confidence is an advantage. Candidates who had previously received positive feedback from the researchers appeared significantly more convincing in the interview than the second group who had not received any positive confirmation in advance. People whose self-confidence had been boosted were rated as better performers by potential employers. Not only what they said played a big role, but above all their body language and charisma.
Similar to applicants, when it comes to self-confident CEOs, it is difficult to determine whether their positive self-assessment is justified. In Schwardmann’s opinion, the “reinforcement effect” is likely to be particularly significant for top managers: people who have continually climbed the career ladder throughout their careers may have only ever received reinforcing feedback and are correspondingly self-confident.
But this says little about whether they are actually successful or whether chance helped a lot. However, the exaggerated self-assessment is likely to encourage bad decisions: “If you are successful and famous, there are fewer and fewer people who will tell you when you are terribly wrong,” explains the behavioral scientist.
Serious consequences of takeovers
The consequences of overconfidence can be serious, not least when it comes to mergers and acquisitions. As research by Ulrike Malmendier and Geoffrey Tate shows, overconfident CEOs overestimate their ability to generate returns. As a result, they overpay for their acquisition targets and make value-destroying acquisitions.
The two economists measured the CEO’s confidence based on their portrayal in the press and the amount of shares and options they hold in the company. If managers are celebrated in the press as superstars and if they hold too many shares in their company for far too long, there is a great risk of overestimating themselves. “They are convinced that its value will soon increase significantly under their fantastic leadership,” said Professor Malmendier in a recent interview. “That’s mostly irrational.”
According to their research, self-absorbed charismatics at the top of an organization are a central cause of entrepreneurial decline. There are plenty of examples of superstar CEOs who were prominently in the spotlight and who damaged the company and its shareholders in the long term: from Pierin Vincenz as a former Raiffeisen -Boss to the former management team of Swissair or Credit Suisse.
Self-confidence is positive for the company
Nevertheless, it is a fallacy to believe that excessive self-confidence is fundamentally harmful. A recently published meta-analysis that examined 199 individual studies comes to the conclusion that excessive self-confidence among company bosses has, on average, a positive effect on company performance. The researchers explain this by saying that overconfident CEOs are more willing to take risks – which is often positive for the company’s success. “Confident CEOs act instead of being inactive,” says co-author Barbara Burkhard from Aalto University in Finland.
Unlike researchers Ulrike Malmendier and Geoffrey Tate, Burkhard and her team did not focus on mergers and acquisitions. As an indicator of the risks taken, they analyzed the expenditure made in research and development (R&D) or investment expenditure. This could at least partially explain the different research results. It may well be that overconfidence when taking over companies usually has negative consequences. On the other hand, overconfidence on the part of the CEO, which is reflected in high R&D spending, can open up crucial market opportunities and increase company value.
Elon Musk: between overestimation of himself and megalomania
So do we need more leaders like Elon Musk, whose tendency to overestimate himself and megalomania is particularly pronounced? It is undisputed that he is a gifted visionary, takes risks and can inspire those around him for his ideas. Musk’s companies are sending rockets into space, transforming the automotive industry and providing the world with high-speed internet. With his countless company foundations, he has become a role model for a generation of young entrepreneurs. The eccentric’s self-confidence seems to be limitless and, according to the information service provider Bloomberg, his fortune is in the three-digit billion range.
But science has some unpleasant news for Musk: As the study cited above shows, it depends on the extent of overestimation of one’s self. According to Burkhard, the statement “The more, the better” is not true. The connection between CEO overestimation and company success is not linear, but rather curvilinear. A very high level of overconfidence is therefore detrimental to the development of a company. This may explain why Musk’s ideas are often a balancing act between loss and profit. His extravagant plans don’t always work, as the recent mistakes and defeats at X (formerly Twitter) illustrate. Since taking over the short message service, the image of the entrepreneur, who was previously considered a genius, has been severely damaged.
* Sonja Veelen: Stacking up: A cultural practice in application and personnel selection processes. Beltz Juventa. Philipps University, Marburg 2021. – Sonja Veelen: Impostors: How they deceive us. A sociological analysis. Tectum-Wissenschaftsverlag, 2012.