Discuss about the Relationship Between Power, Overconfidence And Decision Making.
Overconfidence has a lot of impact on the decision making by an individual. This becomes especially significant in cases where the individual is in a position of power and influence. This position may be in politics and leadership or business. For such individuals the impact of overconfidence on the decisions they make bares consequences that have far-reaching effects on the entire society.
This essay looks into the relationship between power, overconfidence and decision making through the analysis if three articles: Power and Overconfident Decision Making (Nathanael J. Fast, Niro Sivanathan, Nicole D. Mayer, Adam D. Galinsky), How Personalized and Socialized Power Motivation Facilitates Antisocial and Pro-social Decision Making (Joe C. Magee, Carrie A. Langner) and Overconfidence, Monetary Policy Committees and Chairman Dominance (Carl Andreas Claussen, Egil Matsen, Oistein Roisland, Ragnar Torvik).
This article represents the findings from a research conducted to determine the connection between power and overconfidence among the individuals that hold power. The research involves five experiments conducted to test four assumption/hypotheses presented by the author. The objectives of the research were to:
The author classifies overconfidence into three categories: the first one is an individual having an inflated sense of confidence in the accuracy of their knowledge. The second one is an individual having the better than average effect, where they feel they gauge their capabilities in relation to that of other people (Anderson and Berdahl, 2002). The last category is when an individual has an illusionary control over events, where the individual has a false sense of control over events that are out of their control.
The author cites the two cases of the CEOs of BP and AOL who made an overconfident decision due to their position of power that resulted in financial loses for their respective companies and concludes from the research outcome that power leads to overconfidence (Biddle, 1986).
This article presents the results of a research carried out to show how the motivation to get power impacts the decision-making process of the individuals once they get power. The author of the article uses the results from the research to relate the answer to the question: what outcome does an individual want from their influence, to the eventual decision made by the individuals in power. The author also shows how the power motivation affects the need for deliberation by an individual on a given decision.
The article is intended to interrogate the assumption that individuals with high power motivation are generally likely to make decisions that can be termed as selfish or self-serving. The author instead proposes that the purpose of having a need for power determines whether the individual will make selfish or selfless decisions once in power. This is achieved through categorizing individual’s power motivation into two groups: Personalized, where the individual wants power and influence to serve self-interest, and Socialized, where the individual pursues power to serve the interest of the society.
Through two studies in different contexts, the author manages to show that power motivation impacts the nature and speed of decision making of an individual.
This article investigates the consequences of overconfidence among decision makers that are involved in decisions affecting the monetary policy of institutions. It shows how the introduction of Monetary Policy Committees (MPC) has helped in the changing the single-person policymaking in institutions. This is especially in instances that the chairman may have overconfidence in his own knowledge; the MPC is able to regulate the decision making by the chairman (Gerlach-Kristen, 2008).
The author of the article divides the decision-making role of the MPC into two:
The article also investigates the powers assigned to the chairman and the impact such powers have on the MPC such as the agenda-setting rights. To investigate this, the author cites the cases of two FOMC chairmen, Alan Greenspan and Arthur Burns who have both never been on the losing side of a vote during the period they held the position (Blinder, 2004).
This article is based on the research done to establish whether there is a connection between power and overconfidence. However, this research did not have a control experiment that would check the counter-argument that overconfident people tend to get powerful positions (Brunell, et al., 2008).
The researchers tested four assumption/ hypotheses:
The hypotheses were tested in five experiments that were both field-based and in controlled environments such as a laboratory. The first three experiments involved the manipulation of power and exploring whether feeling powerful leads to overconfidence and below par performance in an information task. The fourth examined whether the financial incentive to be accurate affected the relationship between power and overconfidence while the final one assessed whether lacking a sense of power results in reduced overconfidence (Dunning, Heath and Suls, 2004).
As noticed by the author, the sample size for the research was small, and a larger sample is needed to give conclusions with certainty. The author also notes the fact that the experiments were mostly done in a controlled environment meant that other factors were not considered. These factors may have a reasonable impact on the outcome of the research (Fast, et al., 2011).
The author of the article bases their argument on a research done to evaluate whether the power motivation of an individual has any effect on their decision making.
The research hypothesizes that:
The research involved two studies set up to each investigate either of the power motivation types. The first study simulated of the Cuban missile crisis which evaluated the impact of personalized power motivation in a situation of conflict. The second study was approving market release for a life-saving drug that placed individuals in the role of a decision maker in the Food and Drug Administration who decides on approval for the market release of a new drug that on balance would benefit the society (Fodor, Wick and Hartsen, 2006). The second study aimed at evaluating the impact of socialized power motivation in a situation that involved benefit for society.
The research however did not look at the impact of power motivation in non-contextualized situations. The research was also carried out in a controlled environment instead of a real-life one. These two limitations of the research make the findings in the article less conclusive (Magee and Langner, 2008).
The article investigates the effects of possible overconfidence among decision-makers in monetary policy decisions by developing two models.
These models are:
The article concludes that the MPC is a crucial component is reducing the effects of overconfidence on the decision making of a chairman. The author notes that the members of the MPC sometimes tend to side with the decision made by the chairman and concludes that the powers of the chairman should be restricted to help in making the MPC more effective in its role (Claussen, et al., 2011).
Every business entity should have a powerful Monetary Policy Committee (MPC) or Board of Directors (BOD). These two should be reasonably powerful to enable it to work efficiently. This will help them better counter the effects of overconfidence in decision making on the side of the chairman.
The members of the MPC or BOD should be chosen carefully to ensure that the aspect of bias is eliminated. None of the members of the MPC or BOD should be employees of the institution or have any links to the chairman or any members of the staff of the institution. This will ensure that the chairman has no influence over whatever decision the MPC or BOD makes, thereby producing decisions that are in the interest of the institution.
“Pooling by voting” should also be made more of the norm for the MPC and BOD after “Pooling by talking” has been done during deliberations. This will give them a more prominent say in the eventual decision taken.
In general, making the MPC and BOD powerful will give it better chances at keeping the chairman in check and thus deliver more informed and accurate decisions.
The article Power and Overconfident Decision Making (Nathanael J. Fast, Niro Sivanathan, Nicole D. Mayer, Adam D. Galinsky), has been able to prove that power leads to overconfidence, which in turn leads to poor decision making. A solution to this would be to reduce the powers held by an individual in a position of power. This is significantly different from what the author proposes in Power and Overconfident Decision Making (Nathanael J. Fast, Niro Sivanathan, Nicole D. Mayer, Adam D. Galinsky), making the top executive feel incompetent may border on demoralization that could lead to underperformance by the executive. Reducing the power of the top executive manages to reduce the individuals’ sense of power without demoralizing them or making them feel insignificant. Organizations can achieve this by assigning a reasonable number of the roles of the top executive to other members of the organization. This should be done carefully since the aim is to reduce the powers of the top executive to prevent overconfident decision making, and not making the top executive position redundant.
Organizations should make the top executive position Co-, such as Co-Chair and Co-CEO. This strategy is significantly different from reducing the powers of the top executive. In reducing the power of the top executives, the aim is to counter the effects of overconfidence brought about by power. The creation of shared posts for top executive positions on the other hand address the issue of balancing off the two types of power motivation: personalized power motivation and socialized power motivation.
This will help the organization achieve a sense of equilibrium by bringing out the zeal and competitiveness brought by individuals with personalized power motivation and the company interest which will be favoured by individuals with socialized power motivation.
In having two chairs or two CEOs the organization achieves this equilibrium that will help it in making better decisions.
Conclusion
The three articles present important insights on how power affects the decision-making process in an organization.
However, further research must be done with large enough sample sizes and real-life environments used instead of controlled environment. This will produce more conclusive results that would better support the findings in the articles.
We can therefore conclude that there is need to reduce or share the powers assigned to the top executives to manage the overconfidence effects of power and the bias brought about by the power motivation respectively. It is also important to have an MPC or Board of directors with a more significant role in the decision-making process of a business entity.
References
Anderson, C. and Berdahl, J. L. (2002). The experience of power: Examining the effects of power on approach and inhibition tendencie. Journal of Personality and Social Psychology, 83(1), p. 1362–1377.
Biddle, B. J. (1986). Recent developments in role theory. Annual Review of Sociology, 12(1), p. 67–92.
Blinder, A. (2004). The Quiet Revolution: Central Banking Goes Modern, New Haven: Yale University Press.
Brunell, A. B., Gentry, W. A., Campbell, W. K., Hoffman, B. J., Kuhnert, K. W., and DeMarree, K. G. (2008). Leader emergence. The case of the narcissistic leader. Personality and Social Psychology Bulletin, Volume 34, p. 1663–1676
Claussen, C. A., Matsen, E., Røisland, Ø. and Torvik, R. (2011). Overconfidence, monetary policy committees and chairman. Journal of Economic Behavior & Organization, 81(2012), p. 2012.
DellaVigna, S., 2009. Psychology and economics: evidence from the field. Journal of Economic Literature, 47(1), p. 315–372.
Dunning, D., Heath, C., and Suls, J. (2004). Flawed self-assessment: Implications for health, education, and the workplace. Psychological Science in the Public Interest, Volume 5, p. 69–106.
Edwards, J. R., 2008. Person–environment fit in organizations: An assessment of theoretical progress. Academy of Management Annals, Volume 2 , p. 167–230.
Fast, N. J., Sivanathan, N., Mayer, N. D. and Galinsky, A. D. (2011). Power and overconfident decision-making. Organizational Behavior and Human Decision Processes, 117(2012), pp. 249-260.
Fodor, E. M., Wick, D. P. and Hartsen, K. M. (2006). The power motive and affective response to assertiveness. Journal of Research in Personality, Volume 40, p. 598–610.
Gerlach-Kristen, P., 2008. The role of the chairman in setting monetary policy: individualistic vs autocratically collegial MPCs.. International Journal of Central Banking , Volume 4, p. 119–143.
Magee, J. C. and Langner, C. A. (2008). How personalized and socialized power motivation facilitate antisocial and prosocial decision-making. Journal of Research in Personality, 42(2008), pp. 1547-1559.
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