Guide to Decision Making: Getting it More Right than Wrong

Chapter 1

Illusions of control: the confidence trap

“Think it possible that you may be mistaken.”

Quaker Advices and Queries

IN OCTOBER 2008, Wendelin Wiedeking, Porsche’s chief executive, announced an imminent takeover of VW. Hedge funds that had bet on VW’s share price falling were confounded. Tearful fund managers confronted huge losses. Yet within six months, Porsche was almost bankrupt. In a humiliating reversal, VW turned the tables on the predatory Porsche, which lost its independence – when it had seemed to come within an ace of success. Porsche was ruined by overconfidence. Yet why was Porsche so sure? What made it believe that it could dominate a company 82 times its size?

Calamity loves overconfidence. This chapter explores what causes overconfidence and how it can lead to calamity. The starting point is that most managers are confident to begin with. Repeated success makes them even more confident and therefore more prone to behaving recklessly – though without realising it. Business is a game of skill and luck. The important thing is not to depend too much on luck.

Illusions of control

In 1980, Shelly Taylor, a psychologist, published a controversial book entitled Positive Illusions.1 Taylor’s theme (supported by substantial research evidence) is that most people are out of touch with reality most of the time. For instance, whereas depression is popularly regarded as seeing things as worse than they are, Taylor argues that depression is seeing things as they are.