How thin is the line between CEO confidence and overconfidence? Between acceptable risk-taking and extreme risk-taking? Those are among the topics addressed by Don Hambrick, a professor at Pennsylvania State University's Smeal College of Business, during a recent acceptance speech at the Universite Pantheon-Assas, where he received an honorary doctorate.
"Executives are confident if they think there is a good chance their initiatives will work out; executives are overconfident if they are absolutely sure their initiatives will work out," he stated.
The professor outlined four major factors that he and other others' research say bring about extreme risk-taking by chief executive officers. They are:
Recent company performance. Hambrick said CEOs who encounter recent business success start believing it is a reflection of their overall abilities and subsequently become more aggressive in their risk-taking, despite the fact that multiple factors may influence the recent success.
Don Hambrick, professor, Smeal College of Business, Pennsylvania State University
A highly narcissistic CEO. More narcissistic CEOs generally develop extravagant initiatives, "including large acquisitions and dramatic shifts in corporate focus."
Incentives with big upsides and small downsides. Hambrick said stock options tend to make CEOs careless in their risk-taking.