Southeastern Oklahoma State University



Management Decision-making and Optimism

C. W. Von Bergen

Southeastern Oklahoma State University

Management Decision-making and Optimism

Abstract

That Westerners value positive and optimistic outlooks is supported by a robust literature indicating that Americans are excessively and unrealistically optimistic who tend to see their own future as rosier than that of the average person. Such optimism places priority on feeling good and in its various manifestations is associated with numerous well-documented benefits for individuals and organizations. Optimism, however, sometimes comes with a cost—the denial of reality. This paper suggests, however, that the two values can peacefully co-exist and that for maximal effectiveness both optimism and realism are necessary. Because optimism is the ambient state for most individuals, organizations should ensure that realism in decision-making is not neglected. A number of strategies designed to surface realistic optimism are offered.

Management Decision-making and Optimism

People, at least in Western cultures, are optimistic about the future and for good reason. An optimistic outlook appears to provide numerous and varied benefits (Scheier & Carver, 1993). Indeed, optimism, conceptualized as a generalized expectancy that good as opposed to bad outcomes will generally occur across important life domains (Scheier & Carver, 1985, 1992), should generally enhance the performance of individuals (Luthans & Youssef, 2004). The rationale behind this assertion is grounded in a substantial body of work from positive psychology (Seligman & Csikszentmihalyi, 2000), which has empirically demonstrated the benefits of optimism on both physical (Peterson & Bossio, 2001) and psychological well-being (Diener, Suh, Lucas, & Smith, 1999). These benefits are thought to snowball and create upward spirals of additional benefits such as the ability to form coalitions and lasting friendships (Fredrickson, 2001), and increased hardiness and resiliency to distress (Tugade & Fredrickson, 2004). Moreover, it feels good to believe in a bright future; believing otherwise can lead to anxiety (Shepperd, Carroll, & Sweeny, 2008).

Given the benefits of optimism, it is not surprising that a sanguine outlook appears to be the status quo for most people in most instances (Sweeny, Carroll, & Shepperd, 2006). This can have a significant impact on groups discussing strategic initiatives since such discussions lead to a significant shift in the positions of members toward a more-extreme position in the direction in which they were already leaning before the discussion; i.e., group discussion tends to exaggerate the initial position of the group. This reliable and robust finding has been called groupshift (Clark, 1971; Robbins & Judge, 2007).

Since an optimistic outlook appears to be the ambient state for most individuals, group discussion would be expected to lead to higher and perhaps excessive levels of optimism leading some management scholars to suggest that business groups often experience “delusions of success” (Lovallo & Kahneman, 2003, p. 56) that undermine executives’ decisions. Essentially, individual employees’ optimistic biases become mutually reinforcing and unrealistic views of the future are validated by the group (Lovallo & Kahneman, 2003). In its grip, managers make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefits and underestimate costs. They spin scenarios of success while overlooking the potential for mistakes and miscalculations. An overly optimistic view leads to overconfidence in decision-making and is known to negatively affect task satisfaction (McGraw, Mellers, & Ritov, 2004) and performance (Sieck & Arkes, 2005).

Problems Associated with Optimism

Four particularly noteworthy problematic situations involving excessive optimism in groups are groupthink, the planning fallacy, the “winner’s curse,” and hubris of leaders. It appears that unrealistic optimism in some form or the other is associated with these three problem areas.

Groupthink

One type of decision making error is groupthink which is the tendency for members of highly cohesive groups to minimize conflict and reach consensus without critically testing, analyzing, or evaluating ideas (Janis, 1982). The problem is that members of such groups may exhibit illusions of invulnerability creating a sense of invincibility and excessive optimism that encourages extreme risk taking that may lead to mistakes and misjudgments (e.g., Bay of Pigs failure, Challenger disaster, U.S. invasion of North Korea; Von Bergen & Kirk, 1978). Groupthink seems to occur most often when there is a clear group identity, when members hold a positive image of their group that they want to protect, and when the group perceives a collective threat to this positive image (Turner & Pratkanis, 1997). So groupthink is not a dissenter-suppression mechanism as much as it is a means for a group to protect its positive image.

The planning fallacy

Optimistically biased predictions are costly in terms of money, jobs, prestige, or even lives (Sanna, Parks, Chang, & Carter, 2005). Large-scale planning debacles abound, supplying poignant public illustrations of overly optimistic plans gone awry (Flyvberg, Holme, & Soren, 2002; Hall, 1980; Schnaars, 1989). So frequent is this phenomenon that it has been given a name—the planning fallacy, an error in underestimating the time it will take to finish tasks (Buehler, Griffin, & Ross, 1994). For example, the Sydney Opera House, begun in 1957, was originally estimated to be completed in 1963, but a scaled-down version actually opened in 1973—a decade later. The Eurofighter aircraft, conceived jointly by Britain, Germany, Italy, and Spain, was originally planned to be operational in 1997, but the first aircraft were not delivered until 2003 and Boston’s Central Artery/Tunnel project was originally estimated to be finished in 1999, but was not fully completed until 2007.

Winner’s curse

Excessive optimism has also been implicated for the well documented phenomenon called the “winner’s curse” (Hendricks, Porter, & Tan, 2008), a phenomenon akin to a Pyrrhic victory in which individuals bid above an item’s (e.g., an acquisition or merger) true value and thus are “cursed” by acquiring it (Lovallo, Viguerie, Uhlaner, & Horn, 2007). By exaggerating the likely benefits of a project and ignoring the potential pitfalls, executives lead their organizations into initiatives that are doomed to fall well short of expectations.

Leader hubris

It has been argued that excessive optimism can lead to hubris or extreme arrogance, causing executives to engage in excessive risk-taking, grandiose initiatives, and acts of intimidation (Hiller & Hambrick, 2005). An example of such negative effects can be found in a study by Hayward and Hambrick (1997), whose results showed firms with CEOs suffering from hubris to be more likely to acquire other businesses for excessive premiums. Kroll, Toombs, and Wright (2000) explain why such actions are common among executives by arguing that hubris can result in a drive to dominate others and engage in empire building for its own sake. Similarly, Kets de Vries and Miller (1984) have made the case that CEOs’ belief that they will achieve positive outcomes can often lead them to experience delusions of grandeur. Such excessive optimism can cause executives to stubbornly persist in behaviors that have worked well for them in the past and undervalue new or dissenting information (Kroll et al., 2000). This type of behavior may prove to be limiting when exhibited in novel contexts that do not mirror the environment in which such routines were initially developed and found to be useful. In short, success often breeds failure because leaders that have tremendous successes begin to believe in their own invulnerability, become arrogant, and lose their competitive edge (Whyte, Saks, & Hook, 1997).

Reality Checks to Help Avoid Unrealistic Optimism

Researchers have recommended that facing reality should be emphasized as a counterweight to “delusions of success” and the tendency to believe that “all is well” (Keegan & West, 2008; Lovallo & Kahneman, 2003; Lovallo & Sibony, 2006; Lovallo, Viguerie, Uhlaner, & Horn, 2007; Webber, 2008). Few, however, have offered concrete suggestions on how such optimism can be moderated. Hence, a number of approaches, herein called reality checks, that organizations might use to address problematic optimism are offered. Our goal is not to eliminate optimism but, rather, to build a sense of realism into an organization’s culture. And keep in mind that what works for an individual is not always successful on the level of a larger enterprise. While the elixir of optimism may help us get through the day, it may be toxic to corporations when taken in excess.

Regular reality checks can be used to update assessments of progress, fine-tune one’s understanding of potential opportunities, refine causal models of situations, and re-evaluate planned next steps. This involves attention to both environmental and social feedback about whether beliefs fall outside the range of plausible possibilities. With this in mind, let us consider some organizational reality checks.

We have drawn from the work of both psychologists and management experts and have developed the following specific guidelines that could be used to counter optimistic biases in organizations and provide a greater balance between optimism and reality. Companies can better avoid distortions and deceptions by reviewing the way they make decisions and embedding safeguards into their formal decision-making processes and corporate culture. It is essential to realize that these tools are just tools. Their effectiveness ultimately depends on the quality of the resulting discussions, which cannot be effective unless the organization has a culture of reasonably open and objective debate.

Some measures to consider in tempering optimism and providing a greater balance between reality and optimism include the approaches.

Don’t shoot the messenger

Some managers seem to be hopeless worrywarts, but remember former Intel CEO Andrew Grove’s warning that only the paranoid survive (Grove, 1999). Grove emphasized the need for CEOs to be sensitive to potential future problems, even to the point of behavior so diligent that others might perceive it to be compulsive or neurotic. It is better to be aware of a potential problem than not. Over time, managers can calibrate whether some managers or units are indeed canaries in the mineshaft and, conversely, whether managers who dismiss possible dangers do so for valid reasons—or do so out of inertia. Recall the words of 20th century Jewish scholar, Saul Lieberman (n. d.), who observed that the difference between a smart man and a wise one was that “A smart man can work his way out of a difficulty that the wise man will not get into in the first place.” The moral is to not ignore such Cassandras who may be cautioning against risky and overly optimistic initiatives. Listen to the naysayers.

Promote open inquiry

Because there is a frequent tendency for groups to be highly optimistic, leaders should encourage members to be skeptical of all solutions and to avoid reaching premature agreements. It sometimes helps to play the role of devil’s advocate by intentionally finding fault with a proposed solution (Schweiger, Sandberg, & Ragan, 1986). Research has shown that when this is done, groups make higher-quality decisions (Schweiger, Sandberg, & Rechner, 1989). In fact, some corporate executives use exercises in which conflict is intentionally generated just so the negative aspects of a decision can be identified before it is too late (Cosier & Schwenk, 1990). This is not to say that leaders should be argumentative. Rather, raising a nonthreatening question to force both sides of an issue can be very helpful in improving the quality of decisions.

Use subgroups

Because the decisions make by any one group may be the result of optimistic biases, basing decisions on the recommendations of two or more groups can be a useful check. If the groups disagree, a discussion of their differences is likely to raise important issues. However, if the groups agree, one can be more confident that their conclusions are not all the result of optimistic biases.

Provide feedback, good and bad

It would seem that through life experience people would learn that occasionally they are not as competent as their overconfidence might suggest. However, this is not the case. Some time ago Sullivan (1953) marveled at “the failure of learning which has left their capacity for fantastic, self-centered delusions so utterly unaffected by a life-long history of educative events” (p. 80). One reason is that people seldom receive negative feedback about their skills and abilities from others in everyday life (Darley & Fazio, 1980; Kruger & Dunning, 1999; Matlin & Stang, 1978). Even young children are familiar with the idea that “if you do not have something nice to say, don’t say anything at all.” Therefore, feedback, particularly negative feedback, should not be avoided.

Associated with this approach is a recommendation to focus on past history. It appears to be a psychological truism that the best predictor of future performance is past behavior (Aarts, Verplanken, & Knippenberg, 2006; Conner & Armitage, 1998). Thus, there should be an emphasis on determining what has been done in the past. Indeed, over 100 years ago Santayana (1905) noted that “those who cannot remember the past are condemned to repeat it” (p. 284). History is important but has been underappreciated in business (Parnell, Von Bergen, & Soper, 2005). For example, Henry Ford’s remark that “history is bunk” (Bohle, 1967, p. 195) has been quoted with widespread approval in business for more than 80 years. What is the performance history of someone who is proposing an initiative? What is the history of similar programs inside or outside the organization? It is important to reflect on past decisions. A willingness to ask how things emerged—in effect, holding a conversation about conversations with key people—shows that the company can learn from its mistakes. Executives should track the expectations of individuals against actual outcomes in order to examine the processes (such as sales forecasts) that underlie strategic decisions. Companies should review these processes if forecasts and results differ significantly. They can also provide feedback where necessary and show clearly that they remember forecasts, reward realistic optimism, and frown on excessive optimism.

Being realistic means being aware of the individual’s past performance. Consider a person who expects good things to happen. At first glance, this may seem like wishful thinking about events that are out of the person’s control. In some cases, that might be what it is. But for someone who has a consistent history of good experiences, it seems reasonable to expect that good experiences will continue, just as we all expect the sun to continue to rise every morning.

Show interest in the upside and downside

Executives should be grilled on the risks inherent in their forecasts. Managers should display interest in bad or problematic news, and express interest in having more early-warning systems for adverse developments. If a company has deeply ingrained prohibitions against bringing up bad news—particularly if it is considered to be a sign of professional weakness—have brief one-on-one reviews individually with key business managers to discuss their operations and build a spirit of greater openness. Later, in a larger group setting, use the information gathered, starting with challenges common to several units so as not to put any one executive on the spot.

Beware of sunflower management

In an effort to gain favor with their bosses and to advance their own careers, some employees are inclined to give biased favorable, or unfavorable, decisions, depending on what they think senior management most wants to hear. Boot, Milbourn, and Thakor (2005) have labeled this phenomenon “sunflower management,” based on the way sunflowers always bend their heads toward the sun, seeking its life-sustaining rays. The researchers contend that this type of misinformation can have undesirable repercussions on decision-making and, ultimately, affect bottom-line profits in business organizations, and may help to explain why some organizations and individuals make poor investment decisions, pursue bad projects, or discard good ideas altogether. In some cases managers may surround themselves with sycophants who echo what they believe the leader likes to hear, even if they inherently consider the leader’s choices to be flawed (Kroll et al., 2000).

Take the outside view

More formally labeled reference class forecasting (Lovallo & Kahneman, 2003; Flyvbjerg, 2008), this procedure is particularly important for planning and forecasting. An inside view involves forecasting by focusing tightly on the project at hand, considering its objectives, the available resources, and the obstacles to its completion. Scenarios are constructed of upcoming progress and current trends are extrapolated into the future. The resulting forecasts, even the most conservative ones, are typically overly optimistic. Taking an outside view results in much more accurate forecasts and requires planners to examine the experiences of a class of similar projects outside the firm. Steps involved in this scheme require an identification of a reference class of analogous past initiatives, determination of the distribution of outcomes for those initiatives, and placement of the project at hand at an appropriate point along that distribution to obtain a more realistic prediction. Taking such an outside perspective may be vitally important because scholars have documented the inward focus of failing firms (Barker & Duhaime, 1997; Barker & Patterson, 1996; D’Aveni & MacMillan, 1990)

Pay attention to doublespeak

Also called framing or reframing (Tversky & Kahneman, 1981), this activity involves the search for positive aspects of a situation to neutralize or overcome negative aspects. Beware of how situations and proposals in business are presented as particularly optimistic or favorable. For example, with doublespeak, banks do not have “bad loans” or “bad debts”; they have “nonperforming assets” or “nonperforming credits” which are “rescheduled.” Corporations never lose money; they just experience a “negative cash flow” or “negative contributions to profits.” No one gets fired, they just “resign for personal reasons,” and then they are just “transitioning between career changes.” The glass is half full as opposed to half empty and there are never problems or obstacles, just opportunities and challenges. Even simple reframing in hypothetical decision scenarios (e.g., 80% of goal vs. 20% goal shortfall) has been shown to influence willingness to take risks, perceived decision conflict, and aspiration levels as well as the perceived favorability and persuasive appeal of messages.

Conduct an independent second opinion

This resource-intensive way of avoiding overoptimistic thinking involves bringing in experienced outsiders to develop a second draft initiative. These individuals should have a relevant memory to draw upon and are typically much less optimistic and much more accurate than the actual planners and implementers. It is important that these outsiders do not review the initial plan before soliciting their opinions. An executive/consultant with a fresh pair of eyes and no emotional connections can sometimes see things that escape the notice of more knowledgeable in-house colleagues. But all consultants are not created equal. The compromised advice given by accounting consultants to companies audited by the same firm should be warning enough that objectivity or bias can be bought. Consultants can often maximize their income by never being the bearer of “too bad” news and certainly by providing support for management’s existing views. Buyer beware!

Hold second-chance meetings

Before implementing a decision, it is a good idea to hold a second-chance meeting during which group members are asked to express any doubts and propose any new ideas they may have. Alfred P Sloan, former head of General Motors, is known to have postponed acting on important matters until any group disagreement was resolved (Sloan, 1964). As people get tired of working on problems, they may hastily reach agreement on a solution. Second-chance meetings can be useful devices for seeing if a solution still seems good even after “sleeping on it.”

Admit shortcomings

Quite often group members feel very confident that they are doing the right thing (Janis, 1982). Such feelings of perfection discourage people from considering opposing information. However, if group members acknowledge some of the flaws and limitations of their decisions, they may open themselves to corrective influences. No decision is perfect of course, so asking others to point out misgivings about a group’s decisions may help avoid unrealistic illusions of optimism that contributes to poor decision making.

Present next-best ideas

Companies can ask that recommendations include at least one alternative or contingency pathway to the preferred proposal with an accompanying action plan. Such “next-best” ideas are useful not only to calibrate the level of a manager’s risk aversion but also to identify opportunities that a manager might otherwise consider insufficiently safe to present to senior management.

Concluding Remarks

Over the years, optimism has had somewhat of a checkered reputation. From Voltaire’s Dr. Pangloss, who blathered that we live in the best of all possible worlds, to Porter’s Pollyanna, who celebrated every misfortune befalling her and others, to politicians who compete vigorously to see who can best spin embarrassing news into something wonderful, optimism has often given thoughtful people pause. While connotations of naiveté and denial have adhered to the notion, we believe that optimism is a powerful force and is widely seen as a virtue of American culture and a key to success in business because it can fuel the drive to achieve goals and objectives and sustain an individual or a firm through difficulties.

A sense of realism matters, too, grounding optimism before it flits into fantasy and wishful thinking as well as protecting individuals from self-deception in which persons convince themselves that things are different from what available information would suggest. Untethered by reality optimism can become false or uninformed hope or blind faith that everything will turn out fine and leave individuals and organizations unprepared for what can be grim reality. That can lead to disastrous results. Thus, striking a balance between the two is important. That balance is what we have labeled as realistic optimism.

We are not suggesting that optimism is bad, or that managers should try to root it out of themselves or their organizations. Optimism generates enthusiasm and it enables people to be resilient when confronting difficult situations or challenging goals. Organizations have to promote optimism to keep employees motivated and focused. At the same time, though, companies have to generate realistic forecasts and address real problems and opportunities.

A lack of optimism could undermine the visionary qualities essential for superior research and development departments and the esprit de corps central to successful sales forces. In recent years research by a number of scholars has documented that optimism appears to be the ambient state for most people at most times and offers numerous and diverse benefits . Indeed, optimism, conceptualized and assessed in a variety of ways, has been linked to positive mood and good morale; to perseverance and effective problem solving; to academic, athletic, military, occupational, and political success; to popularity; to good health; and even to long life and freedom from trauma.

Research has likewise shown that optimism in some circumstances can have drawbacks and costs, that optimism’s benefits are not unbounded, and may not be an appropriate strategy for all persons. In fact, a downward shift from optimism to an emphasis on reality also offers benefits. People who are overly optimistic about the future are ill-prepared to respond to setbacks that may occur. When available information indicates that expectations are inaccurate, shifting expectations prepares people to deal with the most likely outcomes. Likewise, when an undesired outcome seems possible, shifting expectations downward prepares people by providing protection from an emotional blow. Ultimately, we suggest a balance between optimism and realism: people should be optimistic enough to take advantage of the many benefits of a positive outlook, but they should also sufficiently temper that optimism so that they can motivate preventative action and avoid being caught off guard.

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