Tag Archives: expectation

Unrealistic Optimism Drives Profitability

Overconfident decision-making in financial markets led to myriad negative consequences in the past decade, when companies underestimated business risks. 

Gilles Hilary

Gilles Hilary

In contrast to overconfidence, unrealistically optimistic judgments can result in increased profitability and market value, according to INSEAD’s Gilles Hilary and Benjamin Segal with Charles Hsu of Hong Kong University of Science & Technology.

Benjamin Segal

Benjamin Segal

Hilary, Hsu, and Segal demonstrated that over-optimism differs from overconfidence, and may result in larger growth projections.

Charles Hsu

Charles Hsu

The team drew on earlier work by University of Illinois’s Dirk Hackbarth that showed both overconfident, and overoptimistic managers chose higher debt levels and issued more new debt.
Hackbarth did not differentiate over-confident and over-optimistic investment behaviors, and reported that both tendencies reduce manager-shareholder conflict, which can increase firm value.

Dirk Hackbarth

Dirk Hackbarth

Static over-optimism” refers to an unrealistically positive view of the impact of one’s own actions on future outcomes.
In contrast, “dynamic overconfidence” refers to overvaluation of one’s skills and the accuracy of private information.
In addition, “dynamic overconfidence”  is associated with  underestimates of random events after several positive outcomes, according to Hackbarth.

Together, static over-optimism and dynamic overconfidence lead to “dynamic over-optimism” after successes.

Neil Weinstein

Neil Weinstein

The pervasiveness of this “rose-tinted glasses” view leading to over-optimistic assessments was demonstrated by Neil Weinstein of University of Arizona.
He investigated people’s beliefs about future positive and negative health events, discussed in a previous blog post.
Weinstein reported that people tend to believe negative events are less likely to happen to them than to others, whereas they expect they are more likely than other people to experience positive events.

Hilary’s team built on Hackbarth’s concepts by comparing North American companies’ quarterly earnings forecasts with analysts’ predictions and actual performance.
Then, they calculated the number of company-issued press releases containing optimistic language.

Optimistic performance forecasts were correlated with better-than-expected performance, suggesting that successes led to additional effort and positive expectations.

Hilary noted the potentiating effect of past successful performance, though it may lead to “burnout” after about four quarters due to the challenge of continually exceeding performance expectations.

The team noted that this cycle of over-optimism and burnout might be mitigated by instituting policies to moderate overestimates or underestimates future performance by rewarding executives who provide accurate forecasts.

Sheryl Winston Smith

Sheryl Winston Smith

Similarly, Temple’s Sheryl Winston Smith noted that optimistic entrepreneurs chose higher levels of debt financing relative to equity, facilitating patent-based and product-based innovation among nearly 5,000 US firms tracked by the Kauffman Firm Survey (KFS).

Young-Hoon Kim

Young-Hoon Kim

In contrast to these financial studies, Yonsei University’s Young-Hoon Kim, Nanyang Technical University’s Chi-yue Chiu and Zhimin Zou of University of Illinois reported mixed results for self-enhancing (overconfident) and self-effacing (pessimistic) biases on performance

Chiu Chi-Yue

Chiu Chi-Yue

Kim’s team posited that either over-optimistic or pessimistic biases lead to “self-handicapping” behavior, in which people perform under disadvantageous conditions that provide an explanation for any poor performance outcomes.

Although over-optimism may drive innovation and financial results, longer-term consequences may include performance “burnout,” reduced motivation, and lower performance.

-*How to you manage the impact of optimism bias and pessimism bias on judgments and performance?

Please follow-share-like www.kathrynwelds.com and @kathrynwelds

RELATED POSTS:

Twitter:  @kathrynwelds
Blog: – Kathryn Welds | Curated Research and Commentary
Google+ google.com/+KathrynWelds
LinkedIn Open Group Psychology in Human Resources (Organisational Psychology)
Facebook Notes:

©Kathryn Welds

Confidence Enables Persistence Enables Performance

Brian J. Lucas

Brian J. Lucas

People consistently underestimated the number of creative ideas they could generate if they continued working on a task, particularly on subjectively difficult innovation challenges, found Northwestern’s Brian J. Lucas and Loran F. Nordgren.

Loran Nordgren

Loran Nordgren

People who were undaunted by difficult tasks were more able to persist in developing novel ideas, and their work produced both more ideas and higher quality of innovations than they predicted.
This research suggests the benefits of “grit”, described by University of Pennsylvania’s Angela Duckworth as perseverance and passion for goals, particularly long-term objectives.

Angela Duckworth

Angela Duckworth

In Lucas and Nordgren’s research, more than 20 volunteers had 10 minutes to generate as many original ideas as possible for things to eat or drink at a U.S. Thanksgiving dinner.
Then, external judges evaluated responses for originality and suggestions rated “above average” were eligible to win a $50 lottery.

Volunteers took a break from idea generating, and estimated the number of ideas they expected to generate with another 10 minutes’ effort before they continued the idea development task.
External raters judged ideas developed in the second work phase as significantly more original than those in the initial session.

Screen Shot 2015-10-05 at 5.14.56 PMThese results were replicated with professional comedy performers from SketchFest, the largest sketch comedy festival in the U.S.
Performers received a comedic scene set-up such as “Four people are laughing hysterically onstage. Two them high five, and everyone stops laughing immediately and someone says….”

Their task was to create as many endings as they could during four minutes and to
predict the number of endings they would develop with during an additional four minutes work time.

These professional comedians also significantly underestimated the number of ideas they would develop with on their second attempt, suggesting persistent undervaluation even among experts.
When a task seems challenging, “people decrease their expectations about how well they will perform,” argued Lucas and Norgren, even though “creative thought is a trial-and-error process that generally produces a series of failed associations before a creative solution emerges.”

Thomas Edison

Thomas Edison

These findings indicate that negative expectations can reduce persistence, leading to performance below potential.
They confirm Thomas Edison’s assertion that “Our greatest weakness lies in giving up. The most certain way to success is always to try just one more time.”

This effect was also demonstrated in comparisons of people’s numeric competency including:

  • Objective numeracy, or ability to work with numbers: “If the chance of getting a disease is 10 percent, how many people would be expected to get the disease out of 1000?
  • Subjective numeracy, a self-evaluation of math abilities: “How good are you at working with percentages?”;
    How often do you find numerical information to be useful?
  • Symbolic-number mapping abilities, or predicting and understanding numeric relationships such as a carpenter estimating the amount of wood needed for a project.
Ellen J. Peters

Ellen J. Peters

More than 110 volunteers completed tasks including remembering numbers paired to different objects, then evaluating bets based on risk.
People lower in subjective numeracy and confidence had more negative emotional reactions to numbers and were less motivated and confident in numeric tasks, reported Ohio State’s Ellen Peters with Pär Bjälkebring of University of Gothenburg.

Pär Bjälkebring

Pär Bjälkebring

This negative reaction to quantitative tasks presents significant challenges for those who still need to complete tasks like preparing annual personal income tax forms and expense reimbursement reports.

These studies replicated findings that people are not the best judges of their own skills: In fact, one in five people who said they were not good at math actually scored in the top half of an objective math test.

David Dunning

David Dunning

Conversely, one-third of people who said they were good at math actually scored in the bottom half, validating the Dunning-Kruger effect when incompetent individuals overestimating performance despite feedback.

Justin Kruger

Justin Kruger

Persistence in creative as well as tactical tasks can lead to more plentiful and higher quality results than abandoning difficult efforts.

-*How do you maintain persistence during challenging tasks?
-*How do you verify that your self-perceptions align with actual performance and other’s perceptions?

Follow-share-like http://www.kathrynwelds.com and @kathrynwelds

Related Posts:

Twitter:  @kathrynwelds
Google+
LinkedIn Groups Psychology in Human Resources (Organisational Psychology)
Facebook
Blog: – Kathryn Welds | Curated Research and Commentary

©Kathryn Welds

Concrete Helping Acts Increase “Helpers High” Happiness more than Abstract Goals

Melanie Rudd

Melanie Rudd

People experience greater happiness when they perform specific “prosocial” actions, like trying to make someone smile, rather than pursuing an abstract objective like “trying to make someone happy,” according to University of Houston’s Melanie Rudd, Jennifer Aaker of Stanford and Harvard’s Michael I. Norton.

Jennifer Aaker

Jennifer Aaker

Fifty volunteers were asked to “make someone happy,” or to “make someone smile,” in exchange for a gift card.
When they completed the task, participants described how they accomplished their assignment, and the degree of happiness they experienced.

Michael Norton

Michael Norton

Participants who completed the specific goal, “getting someone to smile,” reported greater happiness than those who worked toward the more abstract, “higher construal level” goal of “making someone happy” – no matter which action they performed to achieve the goal.

Yaacov Trope

Yaacov Trope

Specific goals have a “low construal level”, according to Construal Level Theory (CLT), discussed by NYU’s Yaacov Trope and Nira Liberman of Tel Aviv University.
CLT distinguishes concrete, specific, contextualized, and personal actions from more abstract, distant options based on future time, remote space, social distance, and hypothetical probability.
Team Rudd’s findings demonstrate the emotional impact associated with completing specific prosocial tasks.

Nira Liberman

Nira Liberman

Rudd and team posited that concrete goals reduce the gap between expected and actual impact of one’s actions, and increase goal clarity, measurability, and achievability while setting more realistic outcome expectations.
The team evaluated this speculation by asking participants to rate the degree of similarity between the actual outcome and their expectations before they performed the specific or general task.
Those who performed the more specific action also reported greater similarity between expectations and actual outcomes, as well as experiencing more happiness as a result of their prosocial actions.

Edwin Locke

Edwin Locke

Abstractly-framed goals focus on “why”, broader meaning, and larger purpose, whereas concretely-stated objectives target the “how, found University of Maryland’s Edwin Locke and Gary Latham of University of Toronto.

Gary Latham

Gary Latham

Similarly, smaller expectation-reality gaps were linked to greater satisfaction, happiness, and well-being in research by University of Leiden’s Riël Vermunt and Herman Steensma. 

Riël Vermunt

Riël Vermunt

Rudd’s group replicated Vermunt and Steensma’s findings, for people had a previous friendship or no previous relationship with the beneficiary, and when the prosocial acts varied in magnitude.

Herman Steensma

Herman Steensma

Participants experienced similar degrees of happiness in performing small or large kind deeds, as long as thee specified actions like “increasing recycling of unneeded materials” instead of “supporting environmental sustainability.”

Volunteers were consistently inaccurate in predicting which charitable acts would make them feel most happy 24 hours after they completed the task.

Gal Zauberman

Gal Zauberman

Participants predicted that performing the abstract, “high construal level” task of “making someone happy” would make them happier than the specific task of “trying to make someone smile” – but they actually experienced greater happiness after they did a specific good deed.
Likewise, Wharton’s Gal Zauberman and John G. Lynch of Duke also found that volunteers had inaccurate expectations about future outcomes.

Anyone who has been disappointed when ambitious goals to help others did not result in the desired outcome understands the problems of “donor fatigue” or “helper burnout,” when there is a significant discrepancy between helper expectation and actual outcome.

Carolyn Schwartz

Carolyn Schwartz

This anecdotal experience is confirmed by University of Massachusetts Medical School’s University of Massachusetts’s Carolyn Schwarz, Yunsheng Ma, and George Reed, with Janice Bell Meisenhelder of Emmanuel College, who found that discrepancies between expectations and outcomes are linked to giver unhappiness and dissatisfaction.

Allan Luks

Allan Luks

Rudd and team’s research suggests that much-needed helpers can experience a Helper’s High instead of “helper burnout” when their goals are concretely defined.
Helper’s High is even associated with improved physical health in addition to happiness, according to Fordham University’s Allan Luks.

Helping others is also associated with higher levels of mental health, found Schwartz’s group, although they found less relationship with physical health than Luks.

William Harbaugh

William Harbaugh

The Helper’s High has a physiological basis: “Pleasure centers of the brain” are activated when people make voluntary charitable donations as well as after receiving money for oneself, and even more than when individuals agree to a tax-like transfers to a charity, reported University of Oregon’s William T. Harbaugh and Ulrich Mayr, with Daniel R. Burghart of NYU.

Individuals can increase their experience of happiness by engaging in specific kind acts toward others, and philanthropic organizations can increase volunteer retention by framing requests as concrete, “low construal level” actions.

-*To what extent do specific prosocial actions increase your personal happiness?

Follow-share-like www.kathrynwelds.com and @kathrynwelds


RELATED POSTS:

Twitter  @kathrynwelds
Blog – Kathryn Welds | Curated Research and Commentary  
Google+
LinkedIn Open Group Psychology in Human Resources (Organisational Psychology)
Facebook Notes:

©Kathryn Welds