Maybe it takes a little bit of crazy to be a CEO. Or at the very least, maybe it helps. After all, would you consider Steve Jobs completely ‘normal’? Or might you say he’s a touch overconfident? How about Bill Gates? Facebook founder Mark Zuckerberg?

Timothy Simcoe, of Boston University’s School of Management, and Alberto Galasso, of the University of Toronto, set out to find out if there are any advantages to having an overconfident CEO.?They found that firms with overconfident CEOs invested more in research and development, and were more innovative, than companies led by CEOs whose outlook was more realistic.

The researchers built on earlier work to identify CEOs who were overconfident. They defined an overconfident CEO as one who held onto his or her fully-vested stock options even after the company’s stock had risen 67% in price.

Most CEOs have very strong incentives to diversify their sources of wealth, especially after their company has had a period of very strong stock price performance. It follows that CEOs who choose not to diversify either have a very high risk tolerance or an unreasonably sunny outlook on their firm’s prospects. CEOs who fit this description tend to do more deals and are less careful with cash flows than their peers, yet their companies don’t seem to suffer from this.

When Overconfidence Works

To see if there was a link between overconfident CEOs and research and development or innovation, the researchers examined data from 290 companies and 627 CEOs from 1980 to 1994. This time frame allowed them to find detailed data about CEOs’ stock holdings. (The researchers later confirmed their work using a smaller set of more recent data.)

Firms run by overconfident CEOs seemed to be better at innovation:

Invested about 15% more in research and development Generated 20% more patents per dollar of R&D spending Won patents that were about 20% more likely to be cited by their peers

Simcoe and Galasso also found that overconfident CEOs were able to make more of an impact in industries with thin profit margins, such as textiles, apparel, and non-specialty retail. The researchers suggest that in these industries, successful innovation gives a bigger boost to the CEOs reputation as a turnaround expert.

Is some level of overconfidence pretty much required to be a CEO? How does that affect the rest of the company?

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