By now most of us are fed up with hearing about chronic bad decisionmaking at automotive and financial firms. But for all the rhetoric about the wheels coming off Detroit and the credit market, critics have missed one point: Both situations can be chalked up to too much optimism.
That conclusion can be drawn from a body of work that suggests managers typically underplay obvious uncertainties, thinking they have more control over their firm’s performance than is really the case. Managers also tend to be too optimistic about their firm’s performance because they are highly committed to it.
It isn’t just managers who tend to be overly optimistic about their abilities. An often-cited survey of students conducted by the College Board in the 1970s found that only 2% of them thought they were below average compared to their peers. Only 6% rated themselves below the median in athletic prowess. The study revealed other statistical impossibilities in leadership ability and getting along with others.
Biases of this sort have caught the attention of management experts. One of the more-interesting works in this area comes from researchers Dan Lovallo and Daniel Kahneman. Writing in the Harvard Business Review, they point out that psychologists say we tend to misperceive the causes of events, particularly bad events. Typically people take credit for positive outcomes and attribute setbacks to whims of the gods and rotten luck. Managers are no different.
On this score, I can cite an example close to home. Several years ago the parent company of MACHINE DESIGN was public, so its financial results engendered a lot of coverage in the local newspaper. After a string of terrible quarters, the CEO was shown the door and agreed to one last interview with a reporter. When asked about the cause of his downfall, he claimed it was due to factors entirely outside of his control. With regard to the dismal financials, he shrugged, “I’m not a numbers guy.”
Lovallo and Kahneman also point out that many corporate cultures pressure employees to communicate positive messages. The result can be catastrophic. There are big incentives to accentuate the upside in laying out business plans, they say. So forecasts tend to be overly optimistic and thus distort the follow-on plans. And by definition, projects with the rosiest scenarios are the ones most likely to go forward and thus have the highest probability of disappointment
Pessimists in such situations are often viewed as disloyal. Their negative opinions tend to get suppressed. When this happens, the organization can lose its ability to think critically about the plan of action.
There is hard evidence that such attitudes played a part in the financial woes of today. One place to find it is in the observations of Elmer W. Johnson, a GM executive who left the company in 1988 after being passed over for the CEO slot. In a memo to the GM executive committee, Johnson warned about a failure to encourage open and honest discussion within the company. He also bemoaned the fact that line managers had a fear of reporting bad news to upper management.
There you have it: GM didn’t need to lower its labor costs, just a few more negative thinkers in top management would have done the trick.
— Leland Teschler, Editor