Yes, But WE’RE Above Average

My former employer has published a survey of business people around the world conducted in early November. It’s not particularly surprising, but I especially liked this chart (free registration required), according to which a plurality (39% to 38%) of North American companies think that their profits this fiscal year will be better than last fiscal year. (The “current” fiscal year ends sometime between November 2008 and October 2009, so in most cases it includes the steep part of the downturn.) The global numbers are 38% up and 43% down.

Maybe being an executive at a large company selects for unnaturally optimistic people. I’ve always suspected that there is a significant, quantifiable optimism bias to the statements of business people, even their private ones. (Their public ones, of course, are colored by the desire to positively influence their stock price, which can lead to some interesting results.) It’s something I’ve thought of studying but never had the time for. If anyone knows of any research, let me know.

2 responses to “Yes, But WE’RE Above Average

  1. James, recently some empirical research has been done on managerial overconfidence. These studies have found managerial overconfidence to have significant effects on the firm’s financial policies. Malmendier and Tate classify CEOs as overconfident based on the way in which CEOs exercise their stock options, as well as looking at how the CEO is portrayed in the press (they have two separate measures). Ben-David, Graham and Harvey analyzed 5 years of forecasts by CFOs about stock market returns and confidence intervals from a regular survey of CFOs conducted by Duke University – they found that CFOs are “miscalibrated” on average (seems to be exactly the kind of research you were after).

    Malmendier, Ulrike and Geoffrey Tate. “CEO Overconfidence and Corporate Investment,” Journal of Finance, 2005, v60, 2261-2700.

    Malmendier U., Tate G. Who makes acquisitions? CEO overconfidence and the market’s reaction (2008) Journal of Financial Economics, 89 (1), pp. 20-43.

    Malmendier, Ulrike, Tate, Geoffrey A. and Yan, Jonathan,Corporate Financial Policies with Overconfident Managers(November 2007). NBER Working Paper No. W13570.

    BEN-DAVID, I., J.R. GRAHAM and C.R. HARVEY, 2007. Managerial Overconfidence and Corporate Policies. NBER Working Paper.

  2. Thanks very much. This is great.