The Hedge Fund Talent Brief: Why the most confident candidate is a coin flip

Candidates with great interviewing skills, on average, do not have a better skillset for the position they interview for than candidates who interview poorly. They sound more confident, but that’s about it.

Issue No. 02 looked at why an impressive resume does not equate to stellar performance in the future. This issue looks at how confidence fools hiring panels into making suboptimal decisions when they make new hires.

Three findings on why conviction sells in an interview room, and what a hiring process should test for instead.

Confidence gap per Kruger & Dunning (1999), Journal of Personality and Social Psychology. Overconfidence-and-trading figure per Barber & Odean (2001), “Boys Will Be Boys,” Quarterly Journal of Economics.

Part I  ·  The Confidence Illusion

The least skilled are the least able to see the truth.

We have known this for decades. The experiment behind the Kruger-Dunning effect showed people who scored in the bottom quartile of a reasoning test (at the 12th percentile) believed they would be in the 68th. How could they get it so wrong? They lacked the skillset necessary to accurately judge their own performance. 45-minute interviews reward this exact overconfidence.

Now let’s look at the top performers. How did they predict their outcomes? They underestimated themselves. Why? The most competent people know how much they don’t know, and it keeps them humble.

Part II  ·  Why Conviction Sells

People follow confidence, even when it’s wrong.

Confidence is easy to spot, and panels usually do not have a lot of time to make a decision. Candidates who have more measured answers tend to leave questions in the minds of interviewers, which can let doubt creep in. A number of studies have shown people prefer confidence, even when the overconfident person is wrong. Candidates learn this. They increase bravado, regardless of their abilities, because hiring panels reward it. They do not have the time to pressure test the confidence.

Don’t be the fund taking shortcuts because you feel rushed to ‘fill the seat’. We understand the pain of an open position and the urgency to fill it since a team member has to manage risk on a book he may not specialize in. This very scenario causes angst, leading hiring panels to make rushed decisions. Consider this: hasty hires have a cost over time.

Part III  ·  What Calibration Looks Like, and How to Test for It

Calibration is a better trait than confidence.

Overconfidence carries a price tag outside the interview room too. In a study including more than 37,000 discount-brokerage accounts, researchers used trading frequency as a proxy for overconfidence. The most active traders gave up 2.65 percentage points of annual return to their own activity, against 1.72 points for the least active. The gap came from trading too much, not from picking worse stocks: both groups’ purchases underperformed their sales by a similar margin.

We prefer a trait called calibration. Calibrated PMs can state a position and the specific evidence that would prove it wrong, put a number on their own uncertainty, and update that number the moment they find new evidence. A confident 45-minute session will not uncover calibration, but a good assessment will.

Closing

Does your process reward stories about the past or the skills to perform in the future?

Hiring a calibrated PM who understands the market and their ability to price it accordingly starts before your job search begins. It requires a system that intentionally looks for candidates with the skills and traits to bring high-end performance with them in the future. Importantly, it is not how confidently the candidate can talk about their prior successes. Scientifically backed, statistically rigorous assessments tell you how a candidate processes information, a critical skill for a successful hire.

Psynet Group  ·  New York based  ·  Global Reach
917.336.3542  ·  [email protected]  ·  psybil.io