Rationality, Overconfidence and Leadership

50 Pages Posted: 9 Oct 2000

See all articles by Anjan V. Thakor

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Anand M. Goel

Stevens Institute of Technology

Date Written: September, 2000

Abstract

This paper examines the process by which individuals get selected to be leaders and the attributes of leaders. It develops a model in which managers of a priori unknown ability are being judged relative to each other to determine who should be appointed the leader of the group. Managers are making unobservable choices about the payoff distributions of the projects they manage, and their abilities are being (noisily) inferred ex post from observed project outcomes. We have three main results. First, all managers choose higher levels of project risks when they are competing for leadership. Second, an overconfident manager - one who underestimates his project risk - has a higher probability of being chosen as the leader than an otherwise identical rational manager. Third, an overconfident leader may be better for the firm's shareholders than a rational leader. Numerous implications of the analysis for real-world leadership behavior, new product development, relation of risk-taking to firm size and organization culture are discussed.

Suggested Citation

Thakor, Anjan V. and Goel, Anand Mohan, Rationality, Overconfidence and Leadership (September, 2000). Available at SSRN: https://ssrn.com/abstract=244999 or http://dx.doi.org/10.2139/ssrn.244999

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Anand Mohan Goel (Contact Author)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.anandgoel.org

Register to save articles to
your library

Register

Paper statistics

Downloads
1,522
Abstract Views
4,995
rank
11,555
PlumX Metrics