Sometimes success in basketball comes down to a team’s overconfidence in its abilities. An irrational belief in themselves is what keeps players firing up shots, even when they’re shooting bricks. It’s why a college team, down 31 points with 15 minutes to play, thinks it can still win—and does.
It’s not hard to see how overconfidence can similarly help in a business setting. It might help drive salespeople to keep making calls, even after repeated rejection. Or motivate an entrepreneur to keep toiling away. But what about companies? Do they profit if employees believe they’re better than they actually are? Or are they like the 1994 Knicks, who watched in horror as their chances of winning the NBA Finals slipped away with each John Starks miss? (Full disclosure: some Knicks fans still haven’t recovered.)
A new study circulated by the National Bureau of Economic Research argues that worker overconfidence can benefit businesses, because workers who overestimate their own abilities are less likely to quit, which reduces turnover and saves on training and recruitment costs. The study was released as a working paper, which means it has yet to be reviewed by other academics.
Mitchell Hoffman, a business professor at the University of Toronto, and Stephen Burks, an economist at the University of Minnesota, Morris, asked a fleet of 895 truckers to estimate how many miles they anticipated driving the next week, and compared it with their actual mileage logs. While the drivers who predicted they would be highly productive often were, across the board, drivers over-predicted what they would actually accomplish.
New drivers over-predicted their miles by about 25%, or 500 miles. More seasoned divers were more accurate, but still overestimated by 150-200 miles a week. Because drivers are paid by the mile, they made financial plans based on their predicted earnings potential—and the more they thought they would earn, the longer they stuck with trucking. For the trucking company, the longer the driver stayed on the job, the higher return on the company’s investment in the driver’s training.
The study’s authors used their data to run simulations and found that after 60 weeks, 57% of typically overconfident workers quit. When overconfidence was removed from the simulation, and workers made decisions based on how much they would drive, the expected rate of quitters soared to 76%. As a result, the company’s profits per driver fell—from $4,907 when the overconfident drivers were in the mix, to $1,500 when the pool of drivers was limited to the cold-eyed realists.
Of course, most workers aren’t paid by the mile like truckers. But the results can be applied more broadly: When workers believe they’ll be earning more, they’ll tend to stick around. And the longer they stay, the more their employer recoups any training costs.
Problems do arise when there’s a sizable mismatch between overconfidence and performance. That’s why basketball coaches have long benches, where players can sit, and perhaps bring their expectations a bit closer to reality.