In a sentence, the Icarus Paradox is a business phenomenon that describes why many businesses abruptly fail after years of success. The theory, coined by Danny Miller, derives its name and essence from Greek mythology; specifically, from the story of Icarus. In Greek mythology, Icarus, son of the master craftsmen Daedalus, escapes imprisonment with his father by way of wings constructed from feathers and wax (Miller, 1990). Despite his father’s warnings to avoid flying too close to the sun, Icarus, in his hubris, ignores the warnings. He flies too close to the sun and his wax wings melt, causing him to drown in Aegean Sea (Miller, 1990). The paradox of this myth is that the very wings which caused Icarus’s success, led him to his demise. As easily as an asset can cause a businesses’ success, it can dually cause its failure. This is especially the case when initial success is handled recklessly through over-confidence, arrogance, and conceit. This is the essence of the Icarus Paradox (Miller, 1990).
Miller describes four common trajectories of the Icarus Paradox: focusing, venturing, inventing, and decoupling. The focusing trajectory turns craftsmeninto tinkerers. Organizations who once had detail-oriented, quality-driven engineers with airtight operations, become obsessive, rigidly-controlled firms whose offerings become perfect, but irrelevant (Miller, 1990). The venturing trajectory turns buildersinto imperialists. Organizations who were once growth-driven and entrepreneurial, become greedy and reckless, expanding into businesses they know nothing about (Miller, 1990). The inventing trajectory turns pioneersinto escapists. Once flexible organizations with state-of-the-art products become wasteful firms squandering resources on grandiose inventions (Miller, 1990). Finally, the decoupling trajectory turns salesmeninto drifters. Organizations who began with excellent marketing departments and powerful brand names turn into aimless, bureaucratic firms with stale offerings (Miller, 1990). Each of these trajectories is in line with the overall theory of the Icarus Paradox. A successful strategy when coupled with poor planning, over-confidence, and greed quickly turns an asset into a liability and ultimately, a failure.
How is it possible for organizations to overestimate their abilities so much, that their once successful strategies become their demise? The answer may lie within a psychological theory called the overconfidence effect. The overconfidence effect measures the difference between “what people really know and what they think they know” (Dobelli, 2013, para. 3). Psychologists Howard Raiffa and Marc Albert dubbed this term after interviewing hundreds of individuals as part of a research study. The psychologists would ask participants unusual questions such as, “what is the total egg production in the U.S.” or “what is the number of physicians listed in the yellow pages?” Subjects could answer with any number they deemed appropriate for the given question (Dobelli, 2013). Raiffa and Albert estimated that participants would be somewhere in the range of 2% removed the actual answer. To their surprise, subjects were actually closer to 40% removed from the real answer (Dobelli, 2013). This research suggested that as humans, we tend to have a distorted view on our own capabilities. Time and time again, individuals can be seen overestimating their knowledge and skills. This phenomenon is seen in a variety of areas, most notably, the stock market (Dobelli, 2013).Surprisingly, experts tend to suffer even more from the overconfidence effect than the average person. “If asked to forecast oil prices in five years’ time, an economics professor will be as wide of the mark as a zookeeper will. However, the professor will offer his forecast with certitude” (Dobelli, 2013, para. 3).
When applied to the overconfidence effect, the Icarus Paradox and its cause becomes much clearer. If a particular business strategy is successful, upper level management, obviously, wants to repeat its effect. However, with new-found confidence in the strategy’s abilities, management tends to grossly overestimate its capacity for success. This is how so many organizations inevitably overextend themselves. They have an unreasonable amount of confidence in a strategy that was successful perhaps once or twice with different variables effecting its outcome. It would be wise of business managers to be more skeptical of their success and learn to adjust strategies to fit the ever-changing needs of their organization.
References:
Dobelli, R. (2013). The overconfidence effect. Retrieved from https://www.psychologytoday.com/us/blog/the-art-thinking-clearly/201306/the-overconfidence-effect
Miller, D. (1990). The icarus paradox: How exceptional companies bring about their own downfall. HarperBusiness.
Applying Psychology To Financial Decisions 