Account for the Worst-Case Scenario

As human beings, we tend toward optimism.?In fact, not only are we optimistic, but overly optimistic, even in the face of countervailing evidence.?That irrational optimism is called the “optimism bias” and it is extremely well-documented in experimental psychology.

For example,?although you may know that the?statistical rate of divorce?is 50%, most people believe that their own chance of staying married is far greater than 50%.??The same goes for our perception of our chances of getting cancer, having a car accident, or winning the lottery.?People know that smoking causes cancer, but truly believe that their own chance of getting cancer despite smoking is still lower than statistics indicate.

And it is clear, that the tendency toward unrealistic optimism has some very useful repercussions.?It?gives us hope, and provides the outlook needed to make life choices that we might otherwise choose against, such as raising children, starting businesses and so forth.?

After all, if?we?were completely realistic,?no one would ever open a new restaurant (whose chances of failure are close to?60% in first year) or get married a second time (whose likelihood of ending in divorce is 67%) — or a third time (74% chance of failure).?For most of us, being optimistic is basically a good thing. It keeps us positive about the future and ensures that we take entrepreneurial risks, which stokes the fire of a healthy economy.

Having said that, solopreneurs, business owners and leaders can make extremely poor decisions when they do not account for the overwhelming bias they have toward?seeing the glass as half full instead of nearly drained.

Since we do not operate as though our optimism is irrational,?we make calculated business decisions that are overly risky, and sometimes, downright wrong, because we fail to acknowledge the (likely) downside.?So how can you compensate for your irrational inclination toward expecting the best?

Well, acknowledging that you are prone to this bias can be a very good start.?But just generally knowing a bias exists is not enough, because as extraordinary as it sounds,?even the most rational among us will completely ignore and be blind even to overwhelming data if it contradicts our innately rosy outlook!?Shocking, right?

For example, I had a client who had been a solo consultant for many years.?In that time, he consistently struggled. He would get a client, and make an average income for the duration of the engagement. Then, when the engagement ended, he would search high and low for the next client, languishing with no new revenue for several week or months, start job-hunting believing his consulting career was at an end, and then land another consulting gig and abandon the job hunt. And then the whole cycle would repeat.

If you looked at the 5 year performance of his practice, he never earned even half of what he believed his value to be in any given year.?But as we began our coaching relationship, his projected earnings for the year were?200%?what he had earned the previous 3 consecutive years —?even though it was 6 months into his fiscal year?and he was performing exactly as he had the past?3?years.

He had irrationally high expectations despite an astonishing amount of counter-evidence.?I’ll bet you know someone exactly like that.

Within organizations we make analogous decisions to pursue a goal, keep an employee, stick with a strategy or repeat a practice even though our high expectations are irrational.?Where this optimistic bias becomes particularly pernicious is in our planning.?

Since we never expect an economic downturn (even when EVERY indicator says there will be one imminently), or for our competitors to outpace us in innovation, or that the marketplace may change to make our service obsolete, we do not create ways to deal with those eventualities.?Almost no organization is?immune to this reality.?

It was clear that cameras would become much less?necessary when digital photography moved to the mobile phone — but Kodak simply wouldn’t quite embrace that?reality.?They are now a shadow of themselves, providing niche products?while emerging from bankruptcy,?with only 8,000 employees as compared with 245,000 at their peak. And let’s not even talk about Blackberry? creator, RIM.

One of the best ways to deal with the risks that await your organization is to?indulge in some very depressing scenario planning. Scenario planning is a method of preparing for strategic planning that requires stakeholders to imagine possible road-maps into the future.

For example, you are involved in scenario planning when you imagine the growth of your company to a certain level, and then a possible spin-off or acquisition by another company and a big payday.?You can take the same imagination exercise and propose challenges so that you can anticipate how to plan for those possibilities.?

The challenges that are most likely will come from either your competitive landscape or the economy itself.?And while every business would like to think it is the best at what it does,?pretending that you are invincible is an optimistic bias bordering on the psychotic.?It is so much better to consider how to react when challenges emerge rather than waiting to be taken by surprise.

So get your team together and spend some time imagining the worst.?Then devise an ingenious defense or counter-measure.?That way, you are not denying your optimistic bias, but you are taking it into account so that you can return to its prevailing presence. The alternative is sticking your head in the sand and paying a price later.

Are you ready to serious strategic planning. Schedule a call with me and let's talk about it.