October 6th, 2014
(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: email@example.com
There’s something in this. Narcissism pays both across the wage distribution – because men who spend lots of time in front of the mirror earn more – and in the boardroom: narcissistic CEOs are better paid. And way back in 1986, Richard Roll said that value-destroying takeovers were often motivated by hubris (pdf) – though he was only echoing Kenneth Boulding’s warning (pdf) of 20 years earlier, that:
There is a great deal of evidence that almost all organizational structures tend to produce false images in the decision-maker, and that the larger and more authoritarian the organization the better the chance that its top decision-makers will be operating in purely imaginary worlds.
But I wonder: what exactly is the link between success and narcissistic overconfidence?
On the one hand, there might well be causality from hubris and narcissism to economic success. Narcissists have the thick skins which prevent them being disheartened by setbacks. And they give off more competence cues which hirers mistake for actual competence, and so are more likely to climb up the greasy pole.
However, I suspect there are also two other mechanisms here.
One is a selection effect. Many successful people can retire or downshift in their 40s because a few years of six-figure salaries and London house price inflation should allow one to build up a decent nest-egg: even with with interest rates at their present nugatory level, the price of a decent flat in Hampstead would give you an income of twice the median wage. This means that only narcissists and people daft enough to be “passionate” about their career stay in work long enough to become top managers.
Secondly, Gillian is right – success causes hubris. The thing here is that this can be true even if that success is due just to luck. A new paper by Christoph Merkle and colleagues shows that even neutral observers are fooled by randomness and so see skill where there is in fact only luck. Given the self-serving bias, it’s even more likely that managers will see their own success as due to skill rather than luck. Though this is well-documented in finance, I suspect it also happens in non-financial businesses as high profits here can sometimes be due to the good luck of tail risk not materializing.