Questions And Topics We Can Help You To Answer

Consider this scenario: An organizational decision maker acquires a firm that is on the verge of bankruptcy, believing that the firm’s problems were due to poor management. After successive years of investment without return, however, the decision maker decides to sell-off the acquisition. The organizational decision maker wonders ‘What was I thinking?’ This scenario is an example of a tendency towards unwarranted optimism in decision-making. People have been found to generally hold unrealistically positive views of themselves and their performance. New entrepreneurs widely overestimate the chances that their ventures will succeed, strategic planners in firms grossly underestimate project completion times, and so on.

Managers (or more generally, people) seem to desire personal control over their environment and optimism probably implies a sense of control; i.e. they act as if they can control outcomes in situations that are purely random. For example, they infer that they have greater control if they personally throw the dice than if someone else does it for them. Managers reject the notion of uncontrollable risk, preferring to view risk as a challenge to be overcome by skill and perseverance. This tendency seems to be stronger for top management personnel as they often receive credit for success even when such success could be objectively attributed to other sources. Managers (again, more generally, people) also seem to consistently discount or devalue the significance of outcomes which are delayed, as opposed to outcomes that are close at hand. For example, credit plans that demand payment over a longer period of time are preferred over those that require payment over a shorter period of time; another example, people are increasingly risk tolerant towards lotteries as the temporal distance of the outcomes increases; such tendencies could dispose one to discount future negative events and engage in bold forecasting/decision-making.

Certainly, ambiguity aversion may reflect a healthy cautious outlook, and an illusion of control may reflect a healthy adaptation to an uncertain world. The tendency to give more attention to and be influenced by negative information/outcomes may, however, lead to overestimating of uncertainties and keep people/managers from capitalizing on opportunities. On the other hand, unwarranted optimism may, however, keep people/managers from taking appropriate measures towards defending against or preparing to cope with future negative events. The issue becomes complicated if one takes into account the decision maker’s biases, heuristics, dispositions, cultural influences, etc. How can one reconcile (if at all possible) competing positions and temper such decision-making ‘hubris?”