A manager who defends a forecast in the boardroom with conviction is often the person the room trusts. Yet decision psychology shows that confidence and accuracy are not the same thing. Overconfidence has three faces: overestimating one’s own performance, believing one is better than others, and being excessively certain that one’s beliefs are correct. The third is the most persistent of all. The good news is that all three can be recognized and contained through decision structure.
What Exactly Is Overconfidence—and Why Is It Not One Phenomenon?
Moore and Healy (2008), in an article in Psychological Review, separated three common definitions: “overestimation” means thinking we have performed better than we actually did; “overplacement” means seeing ourselves as above others; and “overprecision” means being too sure that our estimate is correct. The surprising point is that the first two behave differently in hard and easy tasks: in a difficult task, people overestimate their own performance but mistakenly believe they are worse than others; in an easy task, the reverse occurs. Overprecision, however, is more stable than either of the other two.
For a manager, this distinction is practical. A manager who says “sales will grow exactly 20 percent next year” may not be wrong about the average estimate; the error is in the narrowness of the confidence interval. It is that narrow interval that leaves no room for a bad scenario.
Every step of success lifts certainty a little higher than the evidence — Photo: cottonbro studio / Pexels
Why Are Low-Skill Individuals Unaware of Their Errors, and Why Are Senior Executives Not Immune?
Kruger and Dunning (1999), in four studies, showed that participants scoring in the bottom quartile on tests of humor, grammar, and logic overestimated their ability sharply: their scores placed them at the 12th percentile, but they estimated themselves at the 62nd percentile. The authors’ explanation was that the same skill required for good performance is also required to recognize error; improving participants’ skill helped them see their own limitations. The limitation of this evidence is that the samples were student samples, and part of the pattern may be a statistical artifact; Coutinho et al. (2024) address precisely this debate.
But the issue is not limited to low-skill individuals. Frydman and Camerer (2016), in a review in Trends in Cognitive Sciences, write that even senior corporate executives, who typically have high levels of education, make decisions influenced by overconfidence and their personal history; and investors overgeneralize from past returns and trade too much. In a study of Chinese technology companies, CEO overconfidence was associated with less stability in R&D investment, and the quality of internal control and institutional investor monitoring reduced this effect (Huang et al., 2022). In a group of 1,242 older adults aged 58 to 101, overconfidence in financial knowledge was associated with greater self-reported risk tolerance, although it did not predict risk aversion in a behavioral test (Frank et al., 2025).
What Does Psychoanalysis Say, and How Can a Leader Calibrate Their Certainty?
Freud, in Totem and Taboo (1913, Standard Edition, vol. 13), spoke of an ancient belief he called the “omnipotence of thoughts” and linked it to narcissism. He described this attitude as “their unshakable confidence in the possibility of controlling the world” (Totem and Taboo, 1913, Standard Edition vol. 13). From this perspective, part of the successful manager’s certainty is not only data; it is the residue of an ancient wish that the world obey our thoughts. Repeated successes confirm this wish and make it less visible to the person themselves.
The practical response is not to set confidence aside; leadership is impossible without it. The answer is to separate “boldness in action” from “certainty in estimation.” Three structural habits help: always write forecasts as a range, not a single number; before any major decision, ask one person to write down the most likely reason for failure; and compare past estimates with actual outcomes so you know how far your certainty typically runs ahead of reality. Kruger and Dunning’s finding is hopeful: when error-detection skill was strengthened, self-judgment became more accurate.
The top floor offers the widest view, not necessarily the most accurate judgment — Photo: cottonbro studio / Pexels
Conclusion: Confidence Can Be Calibrated Without Losing Nerve
Overconfidence is not a single error; it is three distinct errors, and the most persistent is excessive certainty about one’s own estimates. Research shows that this error affects senior executives and investors as well, and that good governance and outside oversight can reduce its impact. A manager who learns to express forecasts as ranges and to ask in advance about possible failures loses nothing in decisiveness; they only bring it closer to reality.
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Kruger J, Dunning D. Unskilled and unaware of it: how difficulties in recognizing one’s own incompetence lead to inflated self-assessments. J Pers Soc Psychol. 1999;77(6):1121-1134. PMID: 10626367. DOI: 10.1037//0022-3514.77.6.1121
Coutinho MVC, Thomas J, Fredricks-Lowman I, et al. Unskilled and unaware: second-order judgments increase with miscalibration for low performers. Front Psychol. 2024;15:1252520. PMID: 38952836. DOI: 10.3389/fpsyg.2024.1252520
Frydman C, Camerer CF. The Psychology and Neuroscience of Financial Decision Making. Trends Cogn Sci. 2016;20(9):661-675. PMID: 27499348. DOI: 10.1016/j.tics.2016.07.003
Huang Y, Wang X, Li Y, et al. CEO Overconfidence, Corporate Governance, and R&D Smoothing in Technology-Based Entrepreneurial Firms. Front Psychol. 2022;13:944117. PMID: 35910989. DOI: 10.3389/fpsyg.2022.944117
Frank CC, Mottola GR, Chen M, et al. Overconfidence and Financial Risk Tolerance in Older Age. J Gerontol B Psychol Sci Soc Sci. 2025;80(6). PMID: 39968659. DOI: 10.1093/geronb/gbaf032
Freud S. Totem and Taboo (1913). In: Strachey J, ed. The Standard Edition of the Complete Psychological Works of Sigmund Freud, Vol. 13. London: Hogarth Press.
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Featured image: Dominique Barrera / Pexels. In-text images: cottonbro studio / Pexels (both). All images are free-licence stock photographs.
