Talented employees are often over-hyped by their managers to ensure that they put in enough effort. At the same time, less talented employees are typically given too negative appraisals. These are the central findings of research by Professors Silvia Dominguez- Martinez and Otto Swank, published in the July 2009 Economic Journal.

The researchers also find that managers will ”overvalue” employees more often than they&##160;”undervalue” them. This is because the costs of overvaluing are temporary – people quickly find out if they”ve pushed themselves too far – whereas the costs of undervaluing are&##160;permanent – people never test their true abilities.

These findings help to explain why people often misjudge their own ability, why accurate feedback is rare and why people are over- or underconfident in the workplace.

The research uses the example of a ”senior” assessing a ”junior”, for example, at an annual appraisal. The senior wants the junior to put in the right amount of effort – it boosts both their incomes and the income of the company.

Juniors do not know their own ability for certain. They will only put in effort if their ability is high enough to ensure that they produce enough to make the effort worthwhile. They can learn their ability by either listening to their seniors or by assessing their own output as they work.

Consider the case where the appraisal comes before a project. The information from the senior is ”cloudy” in that it is often not fully understood by the junior. For example, firms may use objective criteria but these still have a subjective element.

There is a chance that high ability people can be misled into thinking they are low ability. The outcome of the appraisal will determine how much effort the junior puts into the project&##160;– if any at all – so it is important juniors get the right message.

To ensure that talented people decide to work hard on the project, the employer gives them an overvalued appraisal. This might mean that people of medium ability think themselves high ability – but at least they decide to do the project and in doing so find out more about their own ability. In this way, the downside from overvaluing employees is temporary.

Lower ability employees are also given exaggerated appraisals but these are too negative to ensure they don”t take on the project at all. But this means that they never get to find out any more about their ability – so medium ability employees who mistakenly believe themselves to be low ability could be trapped into thinking they are low ability forever.

Seniors will overvalue more often than they undervalue because the costs of getting it wrong when overvaluing are temporary whereas the costs of undervaluing are permanent.

The authors note the importance of ensuring correct assessments of people”s ability:

”If Shakespeare had had a low perception of his writing ability, perhaps nobody would have known Hamlet.”

”A Simple Model of Self-Assessment” by Silvia Dominguez-Martinez and Otto Swank is published in the July 2009 issue of the Economic Journal.

Silvia Dominguez-Martinez

University of Amsterdam and the Tinbergen Institute | +31 20 525 6932 | S.DominguezMartinez@uva.nl

Otto Swank

Erasmus University Rotterdam and the Tinbergen Institute | +31 10 408 1448 | swank@ese.eur.nl