Rational Managers are Less Likely To Be Promoted

I stumbled across a research paper this morning that makes a very interesting claim.

We develop a model which shows that an overconfident manager, who sometimes makes value-destroying investments, nonetheless has a higher likelihood than a rational manager of being deliberately promoted to CEO under value-maximizing corporate governance.

I've downloaded and skimmed through the paper, but haven't read it thoroughly yet. The reason for CEO selection despite overconfidence seems to be that overconfidence takes a while to reveal itself through bad project choices, thus giving the manager time to move up into a CEO position based on expected value of a project, rather than true performance.

I wonder if this is what leads to the promotion path that so many take which consists of the following steps:

1. Make wild claims and projections that, although unrealistic, are accepted because they correspond to what managers wish was true rather than what is actually true.

2. Work a ton of hours so you look like you are doing something, even though your work is scattered and unproductive.

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3. Leave for a new job at a new company before anyone realizes you were wrong, and rely on the fact that employers won't give bad references for fear of legal troubles.

4. Or, pin the blame on someone else if you stay at your company, beat them at corporate politics, and look like a martyr who sacrificed all for the sake of the company but was foiled by subordinates who didn't perform.

5. Never learn your lesson and continue making the same mistakes because ultimately, you get rewarded with promotions.

6. Destroy a lot of economic value along the way.

  • Lord

    Above all they must try a lot of things. Successes can be touted and failures forgotten. Rationally, companies wouldn’t do half the things they do.