Confidence and Organizations

TL;DR

This paper develops a theoretical model explaining why organizations might prefer overconfident employees, showing that confidence levels are strategically chosen based on how private information interacts with conflicts of interest.

Contribution

It introduces a novel theory linking employee confidence calibration to organizational information and conflict management strategies.

Findings

Organizations prefer employees with constant expected conflict across observations.

Well-calibrated employees are optimal only when private information does not influence conflict.

Overconfidence is optimal when organizations need stronger adjustments to private information.

Abstract

Miscalibrated beliefs are widely viewed as compromising the quality of employees' decisions. Why, then, might an organization prefer to hire an individual known to be overconfident? This paper develops a theory of organizational demand for employees' levels of confidence when private information interacts with conflicts of interest. I study a model in which an employee uses private information to make decisions on behalf of the organization and analyze the belief design problem, namely, how the organization would like the employee to interpret his observations. I show that organizations prefer employees whose actions reflect a constant expected conflict of interest across observations. A well-calibrated employee is optimal if and only if private information does not affect this conflict. When the conflict varies with information, organizations optimally select employees whose confidence distorts their responses to information. Overconfidence is optimal when the organization seeks stronger adjustments to information than a well-calibrated employee would provide.