Overcoming Bias

Share this post

CFO Overconfidence

www.overcomingbias.com

Discover more from Overcoming Bias

This is a blog on why we believe and do what we do, why we pretend otherwise, how we might do better, and what our descendants might do, if they don't all die.
Over 11,000 subscribers
Continue reading
Sign in

CFO Overconfidence

Robin Hanson
Jan 25, 2008
Share this post

CFO Overconfidence

www.overcomingbias.com
8
Share

A recent NBER paper:

We test whether top corporate executives are miscalibrated, and whether their miscalibration impacts investment behavior. Over six years, we collect a unique panel of nearly 7,000 observations of probability distributions provided by top financial executives regarding the stock market. Financial executives are miscalibrated: realized market returns are within the executives’ 80% confidence intervals only 38% of the time. We show that companies with overconfident CFOs use lower discount rates to value cash flows, and that they invest more, use more debt, are less likely to pay dividends, are more likely to repurchase shares, and they use proportionally more long-term, as opposed to short-term, debt.

It would be relatively easy to measure overconfidence in CFO candidates, and choose less overconfident ones.  Since this doesn’t happen, I suspect that CEOs, like bosses of software managers, prefer overconfident CFOs.

Share this post

CFO Overconfidence

www.overcomingbias.com
8
Share
8 Comments
Share this discussion

CFO Overconfidence

www.overcomingbias.com
Tim Tyler
May 15

The viral video "Impossible is Nothing" illustrates the overconfidence effect:

"you must believe beyond any reasonable doubt that you will achieve your goals ... failure cannot be considered an option"

Expand full comment
Reply
Share
Robin Hanson
May 15

Benquo, thanks - made the correction.

Cyan, yes that is plausible.

Expand full comment
Reply
Share
6 more comments...
Top
New
Community

No posts

Ready for more?

© 2023 Robin Hanson
Privacy ∙ Terms ∙ Collection notice
Start WritingGet the app
Substack is the home for great writing