Overconfidence: Most people overestimate their ability to predict uncertain outcomes. Before making a decision, managers have unrealistic expectations of their ability to understand the risk and to make the right choice.

Overconfidence is greatest when answering questions of moderate to extreme difficulty. For example, when people are asked to define quantities about which they have little direct knowledge (“What was Wal-Mart’s 2003 revenue?”

“What was the market value of Microsoft as of March 14, 2004?”), they overestimate their accuracy. Evidence of overconfidence is illustrated in cases in which subjects were so certain of an answer that they assigned odds of 1,000 to 1 of being correct but were correct only about 85 percent of the time. When uncertainty is high, managers may unrealistically expect that they can successfully predict outcomes and, hence, select the wrong alternative.

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