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.
The other trap is to become overconfident about a decision or course of action, which you may have to change in response to customer reactions or market conditions. You may be reluctant to change because of all the hard work that appears to have been wasted.
Colleagues can play a very important part in decision making, by challenging your thinking, playing devil's advocate and offering alternatives. However entrepreneurs often have dominant personality types that are not conducive to encouraging feedback. What they really need are people around them who are prepared to challenge and test their ideas.
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.
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.
Optimists generally cope with setbacks and challenges better than pessimists. They are also better at emotionally engaging audiences with strong visionary leadership and exciting stories about the future. They can calm people's fears and anxieties when things go wrong. But overconfidence in the viability of a business, or an overestimation of one's knowledge and abilities, can make people blind to the challenges ahead or changes in the competitive environment.
Business Strategy Review, Autumn 2007
Review by Joe Gill
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