How Optimism Undermines
by Dan Lovallo and Daniel Kahneman
Included with this full-text Harvard Business Review article:
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work
Delusions of Success
A list of relatedmaterial, with annotations to guide further
exploration of the article’s ideas and applications
Delusions of Success
How Optimism Undermines Executives’ Decisions
The Idea in Brief
The Idea in Practice
Three-quarters of business initiatives ﬂounder—new manufacturing plants close prematurely, mergers and acquisitions don’t
pay off, start-ups fail to gain market share.Why? Delusional optimism: We overemphasize projects’ potential beneﬁts and underestimate likely costs, spinning success
scenarios while ignoring the possibility of
The culprits? Cognitive biases and organizational pressures to accentuate the positive. We can’t eradicate either, but we can
take a more objective view of an initiative’s
likely outcome. How? Reference forecasting:comparing a project’s potential outcomes with those of similar, past projects—
to produce more accurate predictions.
THE OUTSIDE VIEW
We’re subject to numerous cognitive biases:
How to counteract cognitive biases and organizational pressures? Awareness and a more objective forecasting method—especially with
never-before-attempted initiatives. These steps
can give usan “outside view” to augment our
intuitive “inside view”:
Competing for limited funding, we create
project proposals accentuating the positive.
These initial forecasts skew subsequent analyses of market and ﬁnancial information toward
overoptimism: We don’t adjust our original estimates enough to account for inevitable problems.
We ignore competitors’capabilities and plans.
Rushing to secure a new market, for example,
we forget that rivals will follow suit. As competitors ramp up production and marketing, supply outstrips demand—rendering the market
Select a set of past projects to serve as
your reference class.
A studio executive forecasting sales of a new
ﬁlm selects recent ﬁlms in the same genre, featuring similar actorsand comparable budgets.
Assess the distribution of outcomes.
Identify the average and extremes in the reference-class projects’ outcomes. The studio executive’s reference-class movies sold $40 million in
tickets on average. But 10% sold less than $2 million and 5% sold more than $120 million.
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Exaggerating ourabilities and control.
We take credit for positive outcomes while attributing negative outcomes to external factors
and deny the role of chance in our plans’ outcomes. Result? We assume we can avoid or overcome all project problems.
Predict your project’s position in the distribution.
Intuitively estimate where your project would
fall along the reference class’s distribution. The
studioexecutive predicted $95 million as his
new ﬁlm’s sales.
We also fall victim to organizational pressures:
Assess your prediction’s reliability.
We approve proposals with the highest
probability of failure.
Since only the most promising proposals attract
investment dollars, we make overoptimistic
forecasts. Highly overoptimistic proposals are
We reward optimism and interpretpessimism as disloyalty.
Reinforcing one another’s unrealistic views of
the future, we undermine our company’s critical thinking.
Counteract your biased prediction from Step 3.
Based on how well your past predictions
matched actual outcomes, estimate the correlation between your intuitive prediction and the
actual outcome. Express your estimate as a coefﬁcient between 0 and 1 (0 = no...