Making Smarter Agency Finance Decisions Part 4 – Beware Overconfidence

“The easiest thing in the world is self-deceit; for every man believes what he wishes, though the reality is often different” – Demostheneses

Confidence is contagious. Confidence can inspire. Confident people can lead. Over-confidence, on the other hand, can be deadly.

We all over estimate our abilities. Everyone thinks they are smarter, do more housework and are better drivers than other people.  92% of Swedes think they are better than average drivers.

Even as I’m writing this, possibly even as you’re reading this, the thought occurs “Yes, but I am better than average at…” The more expert you are at something the more this thought creeps in. The more you can point to a track record of achievement to back up your claims the more confident you will be.

And this is at the heart of the issue. Confidence is good. Over confidence is bad and we are extremely bad at judging when we cross the line

Case Study

Not a direct experience (thankfully) but it was a classic case of over confidence, bordering on hubris, a few years back about a very well regarded Agency who will remain nameless.

The Agency had a really good track record and an excellent client portfolio. The future looked rosy.

So confident was the founding partner that a generous dividend was paid out and a minority shareholder bought out.

Despite taking a lot of cash out of the business the confidence (misplaced as you might have guessed) in the future led them to take on a very expensive, long term, central London property lease.

Now, this could have had a happy ending but for losing their biggest client at the same time. The agency closed doors shortly afterwards – it had no cash buffer to fall back on and with lower revenues and increased overheads it wasn’t sustainable. Painful but in hindsight predictable. Too much confidence (based on past performance admittedly) led to taking too many risks.

Conclusion

Humility is always an attractive characteristic but what, realistically, can we do to make sure our justified confidence does not tip over into dangerous hubris? I suggest asking yourself the following questions about big decisions;

Is this decision within my core competences? If not, am I confident in the people I’m getting advice from? If so I need to listen carefully to them. Disagree with them if you are convinced but make sure you engage and understand the expert’s point of view.

Always ask yourself “what if”. What if we lose that client? What if we need to scale back/reduce running costs?

Always check on the key metrics. What effect does this decision have on our cash buffer? What will our compensation to revenue ratio be?

It boils down to asking yourself “What if I’m wrong?” Double checking your actions should never undermine your confidence. Check your logic with your peers or with experts in their field. Ask what is the worst that could happen if things go wrong? And then make the jump.