Dysfunctional corporate culture can drive poor outcomes

How do cultures of overconfidence emerge and become infused in an organisation?

When the Enron scandal broke in 2001, it shook Wall Street to its core. But a deeper analysis revealed the dysfunctional corporate culture made it all possible

When the Enron scandal broke in 2001, it shook Wall Street to its core and left thousands of people, who had lost billions of dollars in pensions and stocks, disillusioned and angry. People still wonder how the once-revered Wall Street giant, at the time the seventh-largest company in the US, crumbled almost overnight.

So what did go wrong? The search for answers leads consistently to Enron’s top executives, Jeffrey Skilling and Kenneth Lay, whose massive acts of accounting fraud, corruption and deception covered up the company’s weaknesses until their exposure led to its downfall.

But a deeper analysis reveals the dysfunctional corporate culture that made it all possible. A culture of arrogance permeated the organisation, and many employees felt like they were part of an elite group and believed they were smarter than everybody else. This culture of bravado drove employees to aggressively negotiate deals with questionable financials and take on increased risks under the illusion of invincibility.

How does such hubris become so entrenched within a company? And, more broadly, how do cultures of overconfidence emerge and become infused in an organisation? We recently conducted research to help answer these questions, and our findings reveal that social contagion may play a crucial yet hidden role.

It comes as no surprise that teams and organisations possess distinct cultures and exhibit firm-specific values and norms, some of which are products of personnel selection and reward systems. For example, a company may offer large financial or prestige incentives to employees who flaunt competitive or risk-taking behaviour, thereby fuelling and rewarding feelings of invincibility. But another equally important (and less-obvious) force at play is the firm’s social environment — in other words, who’s around? Humans are exceptionally social creatures. We rely on learning from others, from language and religious rituals to food preferences and moral values. When we enter a social environment where overconfidence is rampant, we may acquire an overconfident mindset.

In our research, we found that people are more likely to become overconfident when others around them express overconfidence. We call this the transmission of overconfidence. If people can “catch” overconfidence from others, this effect may scale up within a company and generate widespread norms.

We found evidence of overconfidence transmission across six studies. To measure overconfidence, we compared participants’ beliefs about their relative performance to their actual relative performance. The more people’s beliefs exceeded reality, the more overconfident we could say they were. We found evidence of overconfidence transmission in many different settings.

In one study, for example, we brought a pair of strangers to our lab and asked them to work alone on guessing people’s personalities based on photographs. We then introduced each person to a partner and had them work together on a similar task. In scoring performance, we compared how close their guesses came to the actual personality ratings supplied by friends and co-workers of the people in the photographs. Before collaboration, one partner’s overconfidence level was unrelated to that of the other, as we would expect. But after their 15-minute collaboration, overconfidence levels converged: When one partner was highly overconfident about their performance, so too was the other person. In fact, even those whose accuracy was high before partnering up became more overconfident upon interacting with an overconfident partner, indicating that social transmission had taken place. This is especially remarkable as neither partner was informed of the other’s level of confidence.

In another study, participants learned the extent to which a peer (who was a previous participant in the study) was overconfident through reading how that person assessed their own performance. Some participants were exposed to an overconfident peer, some to an accurate peer and others to an underconfident peer. To simulate the sometimes-costly nature of overconfidence (such as the risk of mistakes fuelled by overconfidence), we offered extra money for accurate self assessments. Again, people became overconfident after observing someone else who was overconfident.

An abundance of research reveals that overconfident leaders put their firms at risk. But, as our studies show, the havoc they can wreak extends beyond their own reckless decision-making — they may be the first domino to fall, influencing their employees who in turn influence their peers. Inspiring a culture of overconfidence in this way fuels greater peril.

One lesson from the story of Enron is that the success of an organisation depends on cultivating the right social climate and norms — norms that promote grounding in reality and freedom from delusions of grandeur. Understanding the danger of having even a few overconfident employees, whose undue optimism may rub off on us and inhibit our ability to make accurate and informed decisions, can help us identify the roots of dysfunction and, one hopes, cultivate more prudent decision-making.

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Joey T. Cheng is an assistant professor of psychology at York University. Elizabeth R. Tenney is an assistant professor at the David Eccles School of Business at the University of Utah. Don A. Moore is a professor at the Haas School of Business at the University of California at Berkeley. Jennifer M. Logg is an assistant professor of management at Georgetown University’s McDonough School of Business.

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Copyright 2020 Harvard Business Review/Distributed by the New York Times Syndicate