ANZAM 2OO9 Aurirullisn npd $fe* Ieulc*d Acodemy ol lScncgement 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 # scholarorur" " lJlanuscript Central Page 1 of 16 ANZAM 2OO9 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 anxiety 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 biases 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