Optimism Thwarts Risk Identification

This paper, authored by Susan Webber, looks at the impact on an organization of valuing optimism over realism.  She comments that a “feel-good” management style consisting only of support and encouragement encumbers managers from making effective, informed and realistic decisions.  A discussion of only optimistic projections will necessarily miss or disregard major risks to a strategy.  When actual facts of possible failure and obstacles are not openly communicated, they cannot be mitigated.  Webber encourages managers to look at risks and possible downsides as new information important to the strategic goal.

Optimism Leads to Inaccurate Risk Assessments

She points to management techniques in contemporary books such as Tom Peter’s Leadership, which encourage a “can-do attitude” in the face of adversity.  By only embracing positive affirmations managers make about the state of the business or success of a project, companies are missing the opportunity to identify and properly mitigate risks.  Webber indicates that constantly having positive reinforcement pulls managers away from the basics of their jobs including the making of decisions under crisis, creating routines, developing direct reports, and creating plans to deal with high-impact but low probability risks.  Further, managers that are not using enough objective evidence in decision making are letting personal bias and innate behaviors affect the success of their business.  They are more prone to accept an idea they “like” rather than one with factual merits of risk-reward consequences that fits within the company objectives and risk appetite.

Encourage Realistic Versus Optimistic Expectations

Several companies have worked to ensure realism is a vital part of management.  Kroger Corp. attacked the unpleasant trend of changing consumer expectations early and head on, turning the entire marketing strategy of the grocery chain around to meet the threat of losing market share.  The CEO of Pitney Bowes, Fred Purdue, demonstrates his company’s culture of realistic expectations and threats by his willingness to seek out and confront risks and issues, not just to accept that management is taking care of problems and presenting a positive outlook to superiors.  Goldman Sachs was obsessed with containing risks during its rise to industry leadership.

Webber advocates optimism with an appropriate dose of reality.  All of the current fashionable qualities for senior management (being a great salesman, politician, profit-obsessed) can be used within a culture which embraces critical thinking to identify all the positives and negatives of an issue. She gives best practices on incorporating realism and squashing unwarranted optimism in a company.  She emphasizes that senior management must truly embrace this style, and any actions by executives that seem to counteract the message will result in increased cynicism.  Some recommended steps are:

• Don’t shoot the messenger
• Show interest in the downside and the upside
• Shake up habits and procedures
• Establish a house skeptic

A tone at the top that encourages a thorough, realistic analysis of business strategy can greatly strengthen a company’s health.  Top talent is better able to use their skills to assess and effectively mitigate risks with honest communication about possible downsides.  As the financial climate continues to change, firms that have realistic expectations and contingencies plans are bound to end up on top.

Original Article Source: “The Dark Side of Optimism,” Susan Webber, February 2008