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the Right kind of Optimism Book Summary
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Published: November 28, 2007
The right kind of optimism
optimism in business is a double edged sword. On the one hand it generates high levels of activity, motivation and persistence; but on the other hand it discourages us from looking too deeply at our assumptions in case we don''t like what we find. This is particularly relevant for entrepreneurs, where it is vital to be able to try something no-one has done before, but too much optimism stop us seeing the risks whenever there is insufficient data to support our assumptions.
This is why new ventures so often fail, since entrepreneurs are often too bold in their estimates of business success. They launch a business that doesn''t have a marketable product or they don''t raise enough money to survive early cashflow crises.
Research by Rose Trevelyan, a lecturer at the Australian Graduate School of Management, shows that it is possible to have high levels of optimism while also keeping overconfidence in check. Effective business leaders know how to use optimism to keep themselves and others on the right track, but also to ask probing questions of and one''s decisions and the potential for failure. To do this one must recognise situations where overconfidence is most likely to occur, and to reduce it by making a more realistic estimate of personal skills and likely business success. Most entrepreneurs are passionate about what they do and it is easy to get ‘summit fever'', when establishing a venture. One can get into a euphoric state about launching a new product or beating the competition, which produces an adrenalin rush. It is then a small step to becoming blinkered by one''s dreams of growth.
There are three prescribed strategies for testing overconfidence: Cognitive techniques:
Counter argumentation or counterfactual thinking is used to see where a business plan may go wrong, or to challenge assumptions about the business, customers and market. Entrepreneurs can ask questions like ‘What is the main reason I might be wrong about this?'', ‘What data would suggest this decision is incorrect?'' or ‘Has all the relevant information been collected and analysed correctly?'' To break out of a dominant mode of thinking entrepreneurs can also brainstorm new ideas.
Searching for alternatives:
New ventures often emerge out of frustration with existing offerings or inventing a new technology. These opportunities can often look like winners, but entrepreneurs may be missing a trick by not thinkng through alternative applications and markets for their product. This is also important since a successful idea will inevitably attract competition from other players, so adaptation must be part of thinking about the new offering. Managing emotions:
Overconfidence can lead to rash decisions - ask others who are not so emotionally involved for a more neutral view of decisions. Humility and admitting the possibility of failure may be hard but makes you more likely to avoid it.
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