Steven N. Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business; Morten Sorensen is Associate Professor of Finance at Dartmouth University Tuck School of Business; and Anastasia Zakolyukina is Associate Professor of Accounting at the University of Chicago Booth School of Business. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.
“Unskilled and unaware of it.”
— Kruger and Dunning (1999)
Overconfidence is prevalent among corporate executives, and a number of academic studies have blamed overconfidence for distorting executives’ investment and merger decisions. Traditionally, these studies have measured overconfidence using executives’ personal option holdings, using the so-called Longholder measure that was introduced in a seminal study by Ulrike Malemendier and Geoffrey Tate. However, no direct link has been drawn between overconfidence as a psychological trait and the option-based Longholder measure. The findings thus could be confounding overconfidence with other personality traits correlated with but different from overconfidence. It is also possible that the executives’ option holdings are rational, for example capturing a response to governance constraints on executive compensation or private information, rather than reflecting overconfidence.
A challenge for research is then benchmarking extant measures of overconfidence against executive traits. Data on executive traits are hard to find. Our paper leverages uniquely rich data on personality assessments for more than 2,600 candidates for management positions from a consulting firm that specializes in assessing top management candidates ghSMART. Using these assessments, we examine which traits are behind the Longholder measure of overconfidence.