Delusions of Success

How Optimism Undermines Executives' Decisions  

By Dan Lovallo and Daniel Kahneman

SUBMITTED BY:
RIMPY 502204111
RIPUDAMAN502204112
RISHIRAJ SINGH 502204113
RITIK SHARMA 502204114
RITVIJ 502204114
How Optimism Undermines Executives’
Decisions
 In planning major initiatives executives routinely exaggerate the benefits and
often overlook the cost, setting themselves up for failure.
 There are lots of instances when businesses have not performed up to
expectations, like when in early in the 1980s, the United Kingdom, Germany,
Italy, and Spain announced that they would work together to build the Eurofighter,
an advanced military jet.
 The frequency of poor outcomes is an unavoidable result of companies taking
rational risks in uncertain situations. But this can be best explained as a
consequence of flawed decision-making.
 By using a reality check simple statistical analysis executives can gain a much
more accurate understanding of a project’s chance of success.
Rose Colored Glasses

 Most people are highly optimistic most of the time

 Research into human cognition has traced this overoptimism to many sources like
 Tendency of individuals to exaggerate their own talents to believe they are above
average in their endowment of positive traits and abilities
 Tendency to exaggerate the degree of control we have over events, discounting
the role of luck
Accenturing the positive

 In business situations, there are two other kinds of cognitive bias anchoring and
competitor neglect anchoring. When executives and their subordinates make
forecasts about a project, they typically have, as a starting point, a preliminary
plan drawn up by the person or team proposing the initiative.
 Anchoring can be especially pernicious when it comes to forecasting the cost of
major capital projects.
 One Rand Corporation study of 44 chemical-processing plants owned by major
companies like 3M, DuPont, and Texaco found that, on average, the factories’
actual construction costs were more than double the initial estimates.
 The Outside view

• The inside view is one that

 The biases and pressures cannot be escaped, the authors argue, but the experts and every other
they can be tempered by applying a very different method of team member embraced on
forecasting--one that takes a much more objective "outside view" of their violation
an initiative's likely outcome. • The outside view is made
in an attempt to anticipate
 This outside view, also known as reference-class forecasting, the circumstances that
completely ignores the details of the project at hand; instead, it would affect the project’s
encourages managers to examine the experiences of a class of future direction and
similar projects, to lay out a rough distribution of outcomes for this completely neglect the
reference class, and then to position the current project in that specifics of the current
distribution. The outside view is more likely than the inside view to endeavor.
producing accurate forecasts--and much less likely to deliver highly
unrealistic ones, the authors say.
PUTTING OPTIMISM IN ITS PLACE
 Optimism generate much more enthusiasm than it does realism
 Idea to promote decision making or to guide action
 Balance between goal and forecasts

HOW TO TAKE OUTSIDE VIEW 

• Select a reference class
• Assess the distribution of outcome
• Make an intuitive prediction of the position in the distribution
• the reliability of prediction
• Correct the intuition estimate