Overconfidence Can Breed Fraud

While it takes a healthy dose of confidence to reach the top ranks of corporate management, as it underlies decisive and strong leadership, too much confidence can lead managers to go too far and potentially commit fraud, new research by the University of Pennsylvania’s Wharton School finds.

In a developing paper titled “Executive Overconfidence and the Slippery Slope to Fraud,” Wharton accounting professor Catherine M. Schrand and doctoral student Sarah L.C. Zechman examine patterns in frauds to determine whether or not some evolve because executives are simply too optimistic that they can make major changes in their firms, rather than out of pure self-interest.

The research combines results from the psychology literature and enforcement records from the Securities and Exchange Commission, and looks at how top executives might be inclined to engage in fraudulent behavior because they are overconfident about their firm’s ability to perform.

“The main question is whether we can explain fraudulent behavior using knowledge about human decision making,” Schrand said in a statement. “Some fraudulent behavior is the outcome of managers putting themselves in the position where fraud is their only choice. They didn’t start out thinking they would commit fraud and they were not necessarily trying to hurt anyone, but they ended up being in a position where they felt it was the only way to get out of a bad situation.”