Overconfidence Bias (Entrepreneurial Perspective)
Taleb argues that society can benefit from entrepreneurial experiments even when the entrepreneurs lose money. He distinguishes that shared learning from overconfidence that exposes other people to severe harm without comparable personal downside.
THE IDEA
National Entrepreneur Day
Heroism and the respect it commands is a form of compensation by society for those who take risks for others. And entrepreneurship is a risky and heroic activity, necessary for growth or even the mere survival of the economy.
It is also necessarily collective on epistemological grounds—to facilitate the development of expertise. Someone who did not find something is providing others with knowledge, the best knowledge, that of absence (what does not work)—yet he gets little or no credit for it. He is a central part of the process with incentives going to others and, what is worse, gets no respect.5
I am an ingrate toward the man whose overconfidence caused him to open a restaurant and fail, enjoying my nice meal while he is probably eating canned tuna.
In order to progress, modern society should be treating ruined entrepreneurs in the same way we honor dead soldiers, perhaps not with as much honor, but using exactly the same logic (the entrepreneur is still alive, though perhaps morally broken and socially stigmatized, particularly if he lives in Japan). For there is no such thing as a failed soldier, dead or alive (unless he acted in a cowardly manner)—likewise, there is no such thing as a failed entrepreneur or failed scientific researcher, any more than there is a successful babbler, philosophaster, commentator, consultant, lobbyist, or business school professor who does not take personal risks. (Sorry.)
Psychologists label “overconfidence” a disease, blinding people to the odds of success when engaging in ventures. But there is a difference between the benign, heroic type of risk taking that is beneficial to others, in the antifragile case, and the nastier modern type related to negative Black Swans, such as the overconfidence of “scientists” computing the risks of harm from the Fukushima reactor. In the case of the former, what they call overconfidence is a good thing, not something to medicate.
And compare entrepreneurs to the beancounting managers of companies who climb the ladder of hierarchy with hardly ever any real downside. Their cohort is rarely at risk.
What Erasmus called ingratitudo vulgi, the ingratitude of the masses, is increasing in the age of globalization and the Internet.
When to use it
Evaluating early-stage startup investments by considering the potential knowledge gained from failure.
Designing innovation policies that encourage risk-taking and destigmatize failure.
Personal career decisions where taking a risky opportunity might generate learning even if unsuccessful.
Scientific risk assessment: differentiate between exploratory risk-taking and overconfident predictions of safety.
FROM THEORY TO EVERYDAY LIFE
In practice
Failed Restaurant Entrepreneur
A man opens a restaurant out of overconfidence and fails; society benefits from his failure (e.g., the author enjoys a meal there) while he suffers personally and gets no respect.
Fukushima Overconfidence
Taleb invokes risk estimates for Fukushima as his example of harmful overconfidence. His contrast concerns the consequences imposed on others; the passage does not provide a detailed causal account of the disaster.
A MOMENT TO REFLECT
Put it to work.
How can society better recognize and honor the contributions of entrepreneurs who fail?
What distinguishes beneficial overconfidence from harmful overconfidence in different domains?
Think of a personal or observed entrepreneurial venture where overconfidence led to valuable learning despite failure.
Often confused with
References
- Ingratitude of the Masses (Ingratitudo Vulgi) — Erasmus
CONTINUE THE CONVERSATION
Source texts
- Antifragile (Nassim Nicholas Taleb)