Question

Successful business managers need to possess a high level of confidence to succeed and meet the many challenges they face in a fast paced and evolving business climate. There is a razor sharp line that exists between being confident in what we do, and slipping across this fine, hazy line into being overconfident.

We don’t notice this innocent looking trap until we’ve fallen into it. Not only were we not paying attention, we also miscalculated by assuming the way was clear. Making assumptions or jumping to a false conclusion stems from overconfidence. It often leads to calamity, or a very bad case of ‘Oops!’

RJR Nabisco was having a bad year with its stock performance. The CEO of the company, Ross Johnson thought that this was an opportune time to attempt a leveraged buyout to increase the shareholder’s value of the stock. He, and his management group, entered into negotiations with the board of directors’ special committee that had been assigned with the particular task of finding ways to maximize the shareholder value.

Since he was the CEO of Nabisco, Johnson was confident, that because of his close ties to the company; his buy out attempt would be the proverbial ‘no-brainer’. His overconfidence led him to fall into the trap of making assumptions and jumping to an erroneous conclusion.

His first mental lapse was to assume that his company connections would automatically give him the ‘go-ahead’ to make the buy-out happen. He made the second mistake of assuming that his investment bankers would simply have to put the financing in place, and that the RJR board of directors would also give him the power to manage the buyout. So, together with his main financial partner, Shearson Lehman Hutton, he offered an initial buyout price of $75.00 U.S./share.

The initial offering meant that his management team would only have to put up $20 million dollars or 8.5% of the total offer. If the board acceded to this offer then Johnson’s management team would receive 18% of the company’s total equity. Johnson was also insisting that the 18% would be divided equally amongst the 15,000 personnel who were employed for RJR Nabisco. However, he neglected to mention that in reality, only six names actually appeared as the real beneficiaries of the transaction – a real but unintentional ‘Oops!’

So stroked by his overconfidence in closing the buyout he moved ominously close to the waiting banana peel because he wasn’t paying attention to several occurrences that were transpiring in the meantime. First, the board never discussed or made any concessions with Johnson or his financiers. Johnson also never even conceived there were any other players who might also be interested in buying Nabisco. In truth, he had so alienated the board with his attitude that they eventually awarded the buyout bid to an investment banking firm, Kohlburg, Kravis, and Roberts (KKR) for $109 million dollars. One might think they were making the higher bid, right?

Wrong! KKR’s bid was actually lower than Johnson’s bid. The board was so ticked off at Johnson that they took the loss instead because they appreciated KKR’s negotiation flexibility, and believed that KKR would have a more positive influence on the company rather than Johnson’s ‘arrogance and overconfidence’. So the moral of the story is that when you become overconfident and full of yourself, just remember the higher you elevate yourself, the more painful the fall will be when it comes.

1.    Explain how this case study is an example of the non-rational escalation of commitment bias (ch. 4) and the irrational optimism bias.

2.    How did overconfidence and feelings of superiority bring about Johnson’s loss? These biases are discussed in (ch. 5).

3.    Summarize some things Johnson could have done to prevent this error. Use the information in ch. 6 under “Confronting your own biases,” to help you answer the question.

4.    As a leader, would you rather mentor someone who is overconfident, or who lacks confidence? Explain why. How do you think you would approach it? I am looking for your ideas and opinions. You do not need to access outside sources for this question.

Answer 1

Note: This response is in UK English, please paste the response to MS Word and you should be able to spot discrepancies easily. You may elaborate the answer based on personal views or your classwork if necessary.

(Answer) (1) Escalation of commitment bias is when an individual would continue to make decisions despite them being flawed. They continue to take this course of action simply because they have behaved in a similar way in the past or publically made the decision. Therefore, they take this course of action to appear consistent and confident to everyone. Johnson was planning the buy-out in front of his colleagues. Even if he subconsciously felt that he was making mistakes, his overconfidence blinded him towards the true answers. If Johnson would have admitted his mistake and taken a different course of action, he would have had to let down his ego and overconfidence.

Irrational optimism is a by-product of overconfidence. This is when; a person is delusional about their actions and believes that almost anything that they attempt would result in victory. A rational optimist would believe that a positive outcome would happen if their work is done thoughtfully and well. Since irrational optimism is mostly found in overconfident people, they rarely believe that they haven’t been thoughtful and they always think their work is too brilliant to fail. Johnson thought his deal was the best and every aspect of it would result in applause from the stakeholders, his colleagues etc.

(2) Johnson felt that since he is at a top position at the company, there is something about him that makes him better than everyone else. Otherwise, he wouldn’t have been at the top position. Since he assumed this, he also assumed that the special qualities that brought him to this top position would get him out of any situation with ease. This resulted in him assuming that every idea he had was a top-level idea and was pure gold. Because of this, Johnson hardly stopped to rationally and objectively judge the situation. This led to Johnson’s inevitable loss.

(3) Confronting your own bias is when one is able to set aside any bias and assumptions and actually begin to think objectively and logically. A confident person would generally be fine with being wrong. This is because they believe that victory isn’t the source of confidence but rather good intention and the willingness to learn especially from failure is what gives one confidence. An overconfident person keeps getting gratified through victory and they climb higher up this ladder only to eventually fall the moment that they have made a mistake.

Johnson should have simply acknowledged that this was a new and unusual experience and the more opinions, advice and analysis that his team could offer, the better his decision would be. He should have acknowledged that confidence doesn’t require you to know all the answers but have your ears open for the right answer that sometimes doesn’t come from within. Considering that his colleagues were planning different things, if he has met with them in humility and discussed a course, he would have been part of the different plan that they had in mind.

(4) A leader might seldom get the chance to actually pick the kind of personalities that they want to mentor. But, the course of action in both cases is ironically the same. The reason why overconfident people are the way that they are is the same as a bully. A bully is mean because they are suppressing some kind of sad memories and insecurities about themselves. An overconfident person might be in good circumstances and assume that they are better than everyone but, deep inside, they terrible insecurities that they must face. This is the very reason why it takes a cheap person to show off their wealth or a stingy person to hide their wealth. One has simply put on a facade and is lost so deep in this character that they tend to forget deep down that they have no genuine confidence and the overconfidence is a compensation for the lack of confidence.

Similarly, a person who lacks confidence perhaps has only a little-displaced confidence that they might struggle with. The only difference is that they are generally put in cruel situations where no one has put them on a pedestal. It is the people who lack confidence, who earn success by a happenstance and then become overconfident.

A leader’s job would be to strip the pupil of the pedestal or degrading environment and help them evaluate their true self. This would mean that the person would have to acknowledge their good and bad qualities for what they truly are. Such a self-evaluation helps us know ourselves, acknowledge who we are and eventually get comfortable and confident about being ourselves. That would be the appropriate course of action.