Optimism bias is a cognitive phenomenon that often goes unnoticed in high-stakes boardroom discussions, and can significantly influence our decision-making process. This bias, whilst seemingly harmless, can lead to unrealistic expectations and clouded judgment, particularly when it comes to strategic planning, forecasting and decision-making in small businesses.
What exactly is optimism bias? Optimism bias is a cognitive bias that prompts us to underestimate potential risks and overestimate positive outcomes. We tend to believe that we are less likely to encounter negative events than others. whilst optimism is generally a positive attribute, when it transforms into bias, it can distort our perception of reality and our business’s potential outcomes.
Picture this: you’re in the midst of planning an exciting new marketing campaign. The room is buzzing with ideas and there’s a palpable energy. It’s thrilling. However, in the midst of this enthusiasm, we might unintentionally downplay potential challenges. We might overestimate our team’s capabilities, overestimate our potential customers’ engagement, underestimate our competitors’ reactions, or overlook the potential impact of market volatility.
So, how can we harness optimism bias to our advantage whilst maintaining a positive, forward-thinking mindset? Here are some effective strategies:
Leveraging External Insights To Offset Optimism Bias
Inviting external consultants or new team members to review plans can provide a fresh perspective and help ensure that enthusiasm doesn’t overshadow potential issues.
Fostering Open Communication To Mitigate Optimism Bias
Creating an environment where team members feel comfortable voicing doubts or concerns can lead to a more comprehensive and realistic evaluation of strategies and plans.
Preparing For Potential Failure To Combat Optimism Bias
According to a 2017 study, almost half of all small businesses fail by their fourth year. Optimism bias may lead you to believe that your business will be successful, but it’s crucial to acknowledge that failure is common and prepare adequately for the possibility of failure. Spend time doing due diligence before investing your time and money into a new business, learn why other businesses in this field have succeeded and failed and scrutinize the failures closely.
Performing Premortems To Prevent Optimism Bias
Instead of conducting a postmortem analysis after a project has failed, envision the project’s failure beforehand. This proactive approach can help identify potential pitfalls before they become real problems.
Grounding Decisions In Data
Factual data serves as an excellent counterbalance to optimism bias. Ensure that decisions are informed by concrete evidence as much as enthusiasm.
Promoting Diversity Of Thought To Overcome Optimism Bias
Encourage a variety of perspectives in your team. If only one team is influencing the forecast, it could lead to homogenous personality types dominating the inputs, which could result in blind spots. Different perspectives can help identify potential issues that might be overlooked due to optimism bias.
Acknowledging Your Own Optimism Bias
Recognize that optimism bias can creep in and convince you that you are better at certain tasks than you actually are. This is particularly relevant when hiring new team members. Acknowledge that it’s possible that you may think you’re better at hiring than you actually are and take advice from actual experts.
Using Objective Data And Modelling Techniques To Mitigate Optimism Bias
Good decisions are based on having sufficient, objective, accurate and timely data and information on costs, timescales, benefits and risks. Weaknesses in the scrutiny and appropriateness of data and modelling techniques can distort the information on which investments are approved. This will inevitably mask the business, service and external risks.
Implementing Mature Forecasting And Sales And Operations Planning Processes
These processes can play a vital role as they define risks and opportunities, drive scenario planning and encourage stakeholders from various functions such as Commercial, Marketing, Finance and Supply Chain, to be on the same page.
Promoting Awareness of Optimism Bias
Knowledge is power. By educating the team about optimism bias and its potential impact on decision-making, we can help everyone stay alert and vigilant.
Being aware of optimism bias and its potential effects on our strategic decision-making is crucial. By employing these strategies, we can maintain a positive outlook whilst making grounded, realistic decisions.
The Benefits of Optimism Bias
Optimism bias, despite its potential pitfalls, carries significant benefits that can be instrumental in the success of a business.
It fuels the entrepreneurial spirit, inspiring individuals to take calculated risks and pursue innovative ideas. This can lead to the development of unique products, services or strategies that set a business apart from its competitors.
Optimism bias can also foster a positive workplace culture
When leaders display an optimistic outlook, it can boost employee morale, increase productivity, and promote a sense of unity and purpose within the team.
Optimism bias can enhance resilience
By maintaining a positive outlook, businesses can more effectively navigate challenges, adapt to change, and bounce back from setbacks.
Optimism bias can act as a self-fulfilling prophecy
When businesses believe in their potential for success, they are often more motivated to put in the effort required to achieve their goals. Whilst optimism bias needs to be managed to prevent unrealistic expectations or underestimation of risks, it can also be a powerful tool for motivation, innovation and resilience.
As a small business owner myself, I’ve seen firsthand how optimism bias can influence decision-making. I run a business with my wife and sister-in-law, who are my fellow co-directors.
Over the last year, I’ve noticed that our optimism can often lead us to extend timelines, push boundaries and sometimes overlook potential risks. While this optimism has been a driving force behind our resilience and creativity, it has also led to situations where we’ve continued down a path against better judgment. This personal experience has made me realize the importance of balancing optimism with a realistic assessment of risks and challenges.
It’s not about curbing the optimism that fuels our entrepreneurial spirit, but about harnessing it in a way that also acknowledges the realities of running a business. By doing so, we can make strategic decisions that drive our business forward while also safeguarding its future.
If you are experiencing optimism bias in your own business or in your team – or think you might be – I hope this blog goes some way to help you overcome some of the issues.