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Strategies to eliminate negative effects of optimism in organizations

23rd Annual Australian and New Zealand Academy of Management Jou rnal : Conference

Manuscript ID: draft

Manuscript Type: Paper

decision making < 10, Organisational Behaviour, group dynamics < Keywords (Select the 10. Organisational Behaviour, group processes < 10. Organisational keywords for the Track(s) Behaviour, managerial thinking and cognition < 10. Organisational which you have selected on Behaviour, perceptlon < 10. Organisational Behaviour, values < 10. the previous step): Organisational Behaviour

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Strategies to eliminate negative effects of optimism in organizations

ABSTRACT

People in Western cultures value positive and optimistic outlooks. This is supported by a robust literature indicating that people in these societies are excessively and unrealistically optimistic and that they see their future as rosier than that of the average person. Such optimism places priority on feeling good and in its various iterations is associated with numerous well-documented benefits for individuals and organilations. Optimism, however, sometimes comes with a cost-the denial of reality. The two values can peacefully co-exist and for maximal effectiveness both optimism and realism ore 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.

Keywords: Optimism, decision-making, group dynamics, group processes, management thinking and cognition, perception, and values.

People, at least in Westem cultures (Judge, Erez, & Bono, 1998; Woolfolk, 2A0D,

value having positive and optimistic viewpoints-and with good reason. Optimistic

outlooks appear to provide numerous and varied benefits (Scheier & Carver, 1993).

Optimism, conceptualized as a generalized expectancy that good as opposed to bad

outcomes will generally occur across important life domains (Scheier & Carver,

1985,1992), generally enhances the performance of individuals (Luthans & Youssef,

2004) and has been associated with enhanced organizational effectiveness (Luthans,

Avolio, Avey, & Norman, 2001).

The rationale behind these assertions is grounded in a subsiantial body of work from

positive psychology (Seligman & Csikszentmihalyi, 2000) and positive

organizational behavior (Luthans & Youssef, 2001) which has empincally

demonstrated the benefits of optimism on both physical (Peterson & Bossio, 2001)

and psychological well-being (Diener, Suh, Lucas, & Smith, 1999) for individuals

and increased efficiencies for organizations (Nelson & Cooper, 2AU). These benefits

are thought to snowbali and create upward spirals of additional benefits such as the

ability to form coalitions and lasting friendships (Fredrickson, 2001), increased

hardiness and resiliency to distress (Tugade & Fredrickson, 2004), and higher levels ANZAM 2OO9 Page 2 of 16

of organizationai citizenship behavior (Li-Yun, Aryee, & Law, 2047). Moreover, it feels good to believe in a bright future; believing otherwise can lead to causing stress (Shepperd, Carroll, & Sweeny,2008).

PROBLEMS ASSOCIATED WITH OPTIMISM

Despite such an endorsement for ali things positive and optimistic it is important for executives to beware of four particularly noteworthy problematic situations involving excessive (some might say "unrealistic") optimism: groupthink, the planning fallacy, the "winner's curse," and leader hubris. It appears that unrealistic optimism in some form or the other is associated with these four problem areas and organizational ineffectiveness.

Groupthink

One type of decision making effor is groupthink which is the tendency for members of highly cohesive groLrps 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., the U.S. fiasco in the Cuban Bay of Pigs, Challenger disaster;

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).

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 debacies abound, supplying poignant public illustrations of overly optimistic plans gone a'r/ry

(Flyvberg, Holme, & Soren, 2002;Hall,1980; Schnaars, 1989). So frequent is this phenomenon that it has been given a name-the planning fallacy. an eror in Page 3 of 16 ANZAM 2OO9

underestimating the time it will take to finish tasks (Buehler, Griffin, & Ross, 2002).

For example, the Sydney Opera House, begun in 7951 , was originally estimated to be

completed in 1963, but a scaled-down version actually opened in 1973-a decade

later. More recently, former U.S. President George W. Bush under a sign indicating

"Mission Accomplished" spoke of the end of major combat operations in haq in 2003

yet the conflict continues to this day with all U.S. troops now scheduled to depart kaq

by Dec. 37,2017.

Winnerts curse

Excessive optimism has also been implicated for the well documented phenomenon

called the "winner's curse" (Hendricks, Porter, & Tan,2008), an occurrence 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, Uhianer,

& Horn, 2001). By exaggerating the likely benefits of a project and ignoring the

potential pitfalls, executives often lead their organizations into jnitiatives that are

doomed to fall weil short of expectations. For example, the intemational raw

materials boom due to the rapid industrialization in China and other developing

countries resuited in excessive optimism and the 2008 takeover battle between BHP-

Billiton and Rio Tinto the biggest and third biggest mining companies in the world,

respectiveiy (BHP Billiton, 2008). In a pre-emptive endeavor to stave off any

potential BIIP-Billiton takeover offers Rio Tinto acquired a controlling interest in

Alcan Inc. (Rio Tinto, 2008) and generated a large level of debt which was an

acceptable game plan when the metal markets were booming and share prices were

high. However, with the downtum in the world economy from late 2008 and the

BHP-Billiton offer lapsing, the pitfalls of a large debt and falling demand and prices

saw Rio Tinto planning to eliminating some 14,000 positions and seeking input

funding from the Aluminum Corporation of China (Rio Tinto, 2009a). Strong

opposition to this plan has more recently resulted in it collapsing and a joint venture -l ANZAM 2OO9 Page 4 of 16

iron ore partnership being established between BHP Billiton and Rio Tinto, with the latter also going to the equity market for funds (Rio Tinto, 2009b; Rio Tinto, 2009c).

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 were found in a study by Hayward and Hambrick (1991), 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

Milier (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 stubbomly persist in behaviors that have worked well for them in the past and undervalue new or dissenting information (Kroll et al.,

2000). In short, success often breeds failure because leaders that have tremendous successes begin to believe in their own invulnerabiiity, become arogant, and lose their competitive edge (Dess & Picken, 1999).

Indeed, leader hubris is a contributing factor to the well documented decision-making error of escalation of commitment which involves the irational continuance in a project or plan due to time, money, and energy which has previously been "sunk" into the project (Staw, 1981). Because many executives are overly optimistic about their strategies and reluctant to face reality, they are hesitant to back away and iook for new alternatives (Brockner, 1992). Such decision cost these ieaders and their organizations much time, money and energy which could better be spent on other options. Page 5 of 16 ANZAM 2OO9

REALITY CHECKS TO HELP AVOID UNREALISTIC OPTIMISM

Researchers have recommended that facing reality should be emphasized as a

counterweight to "delusions of snccess" and the tendency to believe that "all is well"

(Keegan & West, 2008; Lovallo & Kahneman,2003; Webber, 2008). Few, however,

have offered concrete suggestions on how such optimism can be moderated. Hence, a

number of approaches, herein cailed reality checks that organizations might use to

address problematic optimism are offered. We have drawn from work in both the

psychology and management disciplines 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.

Don't shoot the messenger

Some managers seem to be hopeiess wonywarls, but remember former Intel CEO

Andrew Grove's waming 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, executives

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. The moral is to not ignore such Cassandras who may

be cautioning against risky and overly optimistic initiatives. Listen to the naysayers

and don't "diss" the dissenters.

Promote open inquiry

Because there is sometimes a tendency for groups to be highly optimistic, leaders

shouid encourage members to be skeptical of all potential solutions and to avoid

reaching premature agreements (Steers & Black, 1994). It sometimes heips 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 ANZAM 2OO9 Page6of16

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 made 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. The split between governance and management in businesses is a way of allowing for the checks and balances that subgroups bring to decision-making. The failure to separate out management from the board of an organization as is the case when the position of CEO and Managing

Director are held by one person who then holds sway over both executive and board decisions has been suggested as a reason for many of the major corporate failures of recent times (Monks & Minow, 2008).

Provide feedback, good and bad

It would seem that through iife experience people wouid learn that occasionally they are not as competent as their overconfidence might suggest. However, this seems not to be the case. Some time ago Sullivan (1953) marveied at individuals' "...failure of leaming 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, i980; Kruger & Dunning, 1999; Matlin & Stang,

1978). The concepts of 360' feedback aliows for positive and negative feedback

(Cederblom & Lounsbury, 1980; Nowack, 1993). Page 7 of 16 ANZAM 2OO9

Associated with this approach is a recommendation to focus on past history. A

willingness to ask how things emerged-in effect, holding a conversation about

conversations with key people-shows that the company can iearn 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 and

unwarranted optimrsm.

Show interest in the upside and downside

Executives should be grilled with respect to the risks inherent in their forecasts. One

means of doing this would be through effective governance mechanisms. 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-then it might be appropriate to have brief one-

on-one reviews individualiy 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, Miibourn, and

Thakor (2005) have labeled this phenomenon "sunflower management," based on the

way sunflowers 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 ANZAM 2OO9 Page 8 of 16

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. 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 noted the inward focus of failing firms (Barker & Duhaime,799'7; Barker & Patterson, 1996; D'Aveni & MacMillan,

1 990).

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. Executives should be aware that situations and proposals in business are often 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." Even simple reframing in hypothetical decision scenarios (e.9.,807o of goal vs.20Vo 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 (Von Bergen & Parnell, 2008). Page 9 of 16 ANZAM 2OO9

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 emotionai 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 (e.9., consider Author Anderson and Enron;

Bazerman, Loewenstein, & Moore, 2002) audited by the same firm should be warning

enough that objectivity or can be bought. Consultants can often maximize their

income by never being the bearer of "too bad" of news and certainly by providing

support for management's existing views. Buyer beware!

Hold second-chance meetings

Before implementing critical decisions, it is often a good idea to hold a second-chance

meeting during which group members are asked to express 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."

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 -'l ANZ.AM 2OO9 Page 10 of 16

l0

aversion but also to identify opportunities that a manager might otherwise consider

insufficiently safe to present to senior management.

CONCLUDING REMARKS

Even though there is an overwhelming emphasis on optimism today, over the years, it

has had somewhat of a checkered reputation. From Voitaire's Dr. Pangloss in

Candide (1947) who blathered that we live in the best of all possible worlds to

Porter's (1913), 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 naivet6 and denial have adhered to the notion, we believe that

optimism is a powerful force and is widely seen as a virtue in Western cultures 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.

On the other hand, a sense of realism matters, too, grounding optimism before it flits

into fantasy and 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. This can lead to disastrous

results. Thus, striking a balance between the two is important. That balance is what

we label as realistic optimism.

We are not suggesting thar optimrsm is bad. or that mrnagers should try to root it out

of themselves or their organizations. Optimism generates enthusiasm and it enables

people to be resilient when confronting difficr-rlt situations or challenging goa1s.

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. Page 11 of 16 ANZAM 2OO9

11

A lack of optimism could undermine the visionary qualities essential for superior

research and development departments and rhe esprit de corps centrai 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, athietic, military, occupational. and

political sllccess; 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 at all times. In fact, a downward shift from

optirnism to an emphasis on reality also offers benefits. People who are overly

optimistic about the future may be ill-prepared to respond to setbacks that might

occur. When available information indicates that expectations are inaccurate, shifting

outlooks prepare 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. "When troubling winds abound the

pessimist complains, the optimist expects the winds to change and the realist adjusts

the sails" (Ward, 2009). What is suggested in this paper is a balance between

optimism and realism: business 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 and unprepared. ANZAM 2OO9 Page 12 of 16

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