Research conducted by Dr. Vikram Nanda and Dr. Steven Chong Xiao from the Naveen Jindal School of Management focused on overconfident chief executive officers, including wellknown figures like Elon Musk, Jeff Bezos and Mark Zuckerberg. Their study, titled “Managerial Overconfidence and Market Feedback Effects,” was featured in the December 2023 issue of Management Science, a premier academic research journal. The research delves into the intersection of business decision-making, psychology and the impact of CEO overconfidence on company operations, highlighting years of investigation into this dynamic.

Their sample tracked Standard and Poor’s 1500 companies, examining the top executives’ compensation packages. Together the researchers studied managerial overconfidence and its consequences for a company’s shareholders, stakeholders, direction and outcomes. CEOs have a considerable influence in headlines, and the professors sought to understand and reveal a greatly confident CEO’s role in managing a company.

“Being a CEO takes a certain personality, a certain type of dedication,” said Nanda, O.P. Jindal Distinguished Chair and a professor in the Jindal School’s Finance and Managerial Economics Area. “Is your personality suited for hard work and stress? We saw a difference among managers.”

Looking at the CEOs’ relationship to the stock market was important in their results. Stock price declines might have nothing to do with a firm’s standing. That price change might be triggered by unrelated factors, such as investors needing to pull their money for reasons not related to a company’s strength. Many managers would take this price drop as a negative, adjusting their business strategies in a more conservative direction, said Xiao, an associate professor in the Finance and Managerial Economics Area in the Jindal School and the Area Coordinator for the PhD in Management Science, finance concentration.

In contrast, an overconfident CEO, he said, often believes the price drop has nothing to do with the business’ fundamentals. Different personalities react in diverse ways. An average CEO, by reacting in a conservative manner, might lead the business to decline, while the overconfident manager is not influenced by a price drop.

“They have confidence in their own view, ignore the external signals and forge ahead,” Xiao said. “And that can be a good thing.”

Among their findings is that overconfident managers are less responsive to stock prices because of their strong opinions of their own leadership abilities. This results in the CEOs maintaining their investment policies for their business, regardless of stock price activities. Consequently, company stocks led by overconfident CEOs are less susceptible to stock price movement.

“These chaps are so confident that the company is going to do well that they hold on to their shares of their company, even if they are not required to do so.” – Dr. Steven Chong Xiao

To define who the overconfident CEO is, the researchers developed media measures and examined how CEOs exercised their stock options, relative to other CEOs. Many CEOs, who have much of their wealth tied to company stock, sell them quickly, according to Nanda, yet the overconfident CEOs tend to take years to do so.

“In some sense, they’re doubling down on their risk-taking,” Nanda said. “These chaps are so confident that the company is going to do well that they hold on to their shares of their company, even if they are not required to do so. They hang on to their shares and ignore the market.” CEOs who appear overconfident often are prized for that trait, Nanda said. “Over time they’ve been successful, and they’ve been rewarded for it,” he said. “Some are lucky, and they’ve been rewarded for it.”

Xiao said he sees advantages and disadvantages in a company hiring an overconfident CEO. Hiring managers and investors might pay attention. “Some level of confidence is necessary to help the firm sustain through difficult times, such as market turmoil,” Xiao said. “They have the confidence to keep moving forward. As an investor, what I would do is invest in a company managed by someone with a strong, confident personality, but I would diversify my investments.”