Do Corporate Managers Make Each Other Overconfident?

My last post discussed statistical evidence that managerial overconfidence is associated with greater innovative activity by firms, and greater innovative success (do I need to mention Steve Jobs again?). I promised in follow-up to discuss whether overconfidence spreads from CEO to CEO like the flu, and (this will be my next post) whether the friendship paradox (explained at Wikipedia and at Rankmaniac 2012) causes a more general contagion of overconfidence from person to person.

My starting point is that people acquire thinking and personality styles from those they interact with. Furthermore, corporate CEOs socialize with other CEOs. They are linked to each other in various social networks, from charities and golf clubs to common memberships on boards of directors. This suggests that the prevalence of high CEO confidence (and perhaps overconfidence) reinforce itself through social interactions.

This is not completely obvious. It could be that being exposed to overconfident individuals with dominant personality styles is intimidating, which tends to reduce the confidence of those they interact with. Not everyone can be at the top of a dominance hierarchy. So whether the tendency of CEOs to interact with each other strengthens or weakens their confidence is an empirical question.

In my next post I'll offer a more general argument based on the friendship paradox for why social interaction may tend to cause overconfidence to spread through society.