Nothing Ventured, Nothing Gained: A Meta-Analysis of CEO Overconfidence, Strategic Risk Taking, and Performance

Although overconfidence is acknowledged as one of the most common managerial decision-making biases, much uncertainty remains about its implications for firm performance. To resolve this uncertainty, we investigate how and why CEO overconfidence is related to firm performance using meta-analytic techniques on a sample of 199 studies. In particular, relying on behavioral decision theory, we develop alternative hypotheses regarding the impact of CEO overconfidence on firm performance. Contrary to the conventional belief that CEO overconfidence is detrimental, this study reveals that CEO overconfidence is, on average, beneficial for firm performance. Drawing on recent refinements of upper echelons theory and theoretical insights from the psychology literature, we then dive deeper into this positive relationship and hypothesize that overconfident CEOs engage in strategic risk taking through cognitive, motivational, and social mechanisms. This risk taking is positively related to firm performance. Our results confirm that the positive relationship between CEO overconfidence and firm performance is partially mediated through strategic risk taking. Thus, although CEO overconfidence is a cognitive bias, it does not automatically lead to inferior performance but can create value for firms by impelling CEOs to take actions that involve risk. We also test whether this relationship is stronger under conditions of high managerial discretion. Our results generally validate these predictions. Finally, on the basis of our findings, we discuss implications and directions for future CEO overconfidence research, including determining the limits of CEO overconfidence, exploring new moderators and mediators, and investigating the implications of different operationalizations of CEO overconfidence as well as the implications for practice.