Finding Your Balance

Hi, I’m David and my mission in life is to prepare people for the future of work.?

In this week's edition of the newsletter the theme revolves around overconfidence. Confidence is generally seen as a positive trait, a trait one should develop in himself/herself in order to achieve success in whatever field one is working in. And success compounds. The longer this success lasts, the more a person’s confidence grows. But, there is a catch. This increase in confidence is initially positive given that it enables an individual to take risks, to expand, to grow. However, the tricky part is that if success is sustained for long enough, an increase in confidence can morph from an advantage into a significant disadvantage. Confidence operates on a thin line. Possess too little and you will never take enough risk. Possess too much and you will take imprudent risks with potentially terrible consequences. This is why, as with most things in life, having the right balance is critical for your wellbeing. What the ancient Greek philosopher Aristotle called the ‘golden mean ’ or, in other words, finding the middle ground between two extremes. Below are some insights and thoughts that will help you reduce your tendency towards overconfidence and ultimately find your balance.

Timeless Insight

“We tend to overestimate our ability to predict the future.” – Peter Bevelin

Bias from overconfidence is an innate human state. Thus, it is only natural that we believe good things about ourselves and our skills. In Seeking Wisdom , Peter Bevelin writes: “Most of us believe we are better performers, that we have a brighter future, a happier marriage, are less vulnerable than the average person, etc. But we can’t all be better than average.” This inherent base rate of overconfidence is especially strong when projecting our beliefs about our future. Over-optimism is a form of overconfidence, and Peter Bevelin argues that: “People tend to put a higher probability on desired events than undesired events.” One way to restrain our tendency toward overconfidence is to habitually position ourselves in such a way that renders a prediction of the future unnecessary. You might not know with certainty when the next pandemic or natural disaster will occur, but you do know it'll come eventually. And that means you should leave yourself positioned accordingly. The purpose of positioning is to make predicting the likelihood of an event to take place a rather unnecessary exercise. However, the argument against preparing in advance is one of efficiency (i.e. it is more efficient to only prepare when you need to). Being prepared at all times carries a cost. Overconfidence lulls you into a false sense of security about the future and ensures your position is weakest at the very moment you need it to be strongest. When the storm comes, it will not give you a warning. And, in Seeking Wisdom , Peter Bevelin reminds us that: “Overconfidence can cause unreal expectations and make us more vulnerable to setbacks.” Instead, he advises us to: “Focus on what can go wrong and build in some margin of safety.”

Food for Thought

Why did Kodak , the pioneer of photography, fail to anticipate the digital revolution that began in the 1990s? They were confident in their film dominance and didn't prioritise developing digital cameras, which ultimately led to their decline and eventual bankruptcy in 2012.?

Why did Blockbuster , the dominant video rental chain in the early 2000s, dismiss the rise of streaming services like Netflix ? They believed their brick-and-mortar model was invincible, leading them to miss out on the chance to pivot and ultimately filing for bankruptcy in 2010.

Why did 诺基亚 once a leader in the mobile phone industry, dismiss the threat of smartphones like 苹果 's iPhone ? They believed that consumers wouldn't want such phones due to their size, complexity, and higher price points compared to their iconic Nokia 3310 .?

There are countless other similar examples from the corporate world (and not only) of companies that failed to adapt to changing market conditions due to the overconfidence of their C-suite. Your confidence can grow a business, but your overconfidence can hurt it.?

The problem is that even if you start out with a moderate level of confidence, the more wins you get under your belt, the higher your confidence grows. And the longer this success lasts, the more likely it is that overconfidence will creep in, planting the seeds of future failures.?

The tricky part is that this increase in confidence is initially positive because it is what enables a leader to take risks, expand and grow his/her business. However, if success lasts, an increase in confidence can morph from an advantage into a significant disadvantage.

The fact is confidence operates on a thin line, which we have to walk on. Possess too little and you will never take enough risk. Possess too much and you will inevitably take imprudent risks. This is why, as with most things in life, having the right balance is critical.

After dodging Ebola, SARS, and other outbreaks, people became overconfident that we could continue to evade pandemics. As a result, preventative measures were removed or neglected. We all know how this played out, with the outbreak of the COVID-19 pandemic.

After decades of relative peace on a global scale following the end of the Cold War between the United States and the Soviet Union, many political analysts grew confident that this was the natural state of affairs. Then, hot wars broke out in Eastern Europe and the Middle East.?

After a fifteen-year bull market that brushed off a global pandemic and higher interest rates many investors are convinced that the economy is headed for a “soft landing” and that this bull market is here to stay. As a result, risk seeking behaviour is slowly returning to the fore.?

So, what does this mean? It means that overconfidence has become incredibly pervasive. Why? Because success breeds confidence, and while there are wars still raging on in Ukraine and in Gaza, we’ve survived a pandemic and the world’s economies are recovering.?

So, what can one do to avoid falling into the trap of overconfidence, and the consequences such a behaviour comes with? Charting your own path. This can be a lonely road at times, one that forces someone to assess both the situation and themselves in the process.?

Choosing this path does not mean that you will become a contrarian and disregard the most popular opinion about a fact, economic matters, or the world in general. It also does not mean that you will stop taking risks. It means you will recalibrate your confidence level.

In the world of investing, which I started to discover some years ago, I have found out that confidence is a constant struggle to find your balance. At some points, the stock market will make you feel like a genius, while at other points it will make you feel anything but.?

One thing I learned along the way is that every time I have crossed that thin line into the realm of overconfidence, I have been humbled shortly thereafter. Thus, the longer I do this, the more I realise that these are the moments when I need to find my balance again.

Article of the Week?

Elon Musk and the Question of Overconfidence

Caricature of the Week

Source: Condé Nast

Thank you for reading and keep on growing!

David

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