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Management Decision-making and Optimism
C. W. Von Bergen
Southeastern Oklahoma State University
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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.
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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
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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
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threat to this positive image (Turner & Pratkanis, 1997). So groupthink is not a dissentersuppression 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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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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