What Deflates an Overconfident CEO?

Overconfident CEOs overestimate the returns to their investments, and research has long treated that overconfidence as a fixed personality trait. This study shows that it moves.

The mechanism is the availability heuristic: vivid, salient events loom large in judgment. When a CEO to whom an executive is socially or professionally connected is dismissed unexpectedly, an event the paper calls a network turnover shock, it serves as a stark reminder of how precarious the job is.

After such shocks, CEOs behave less overconfidently. They become less likely to hold vested deep-in-the-money options in their own firm, a classic marker of executive overconfidence. They also make fewer acquisitions in the following year, and the deals they do make are of higher quality.

Hubris, in short, is not destiny. Events within a CEO's network create real variation in confidence over time, with consequences for one of the largest decisions a firm makes.