Posted on Harvard Business Review: March 18, 2011 10:02 AM
Most businesses fail, eventually.
They succumb to changing times and conditions, to innovations by competitors, to poor decisions and lack of adaptability by their owners and managers, and to bad luck. Think of all the businesses, once giant and dominant, that have been relegated to the dustbin of history: Pan Am, Digital Equipment Corporation, Polaroid, Lehman Brothers, the old General Motors. And think of the many thousands of smaller enterprises that have risen, thrived, slowly declined or spontaneously combusted, and passed from the scene.
Were all these failures a foregone conclusion? Could they each have been predicted with certainty? No — and a good thing, too, or else many successful companies might never have gotten off the ground in the first place. It's true that the natural necessity of business failure has been acknowledged since Schumpeter first described "creative destruction" as the driving force of capitalism. But there also persists a curious kind of blindness or amnesia regarding the odds against success that is obviously deeply human—and that no doubt accounts for both some of our greatest meltdowns as well as American business culture's historical resilience in the face of adversity.
Many smart people have written about the dangers of cognitive bias and our tendency to pooh-pooh possible negative scenarios in business decision-making, including Nobel Prize winner Daniel Kahneman, HBS professor Max Bazerman, and more recently Stanford and Oxford scholar Jerker Denrell.
But the flipside of such cognitive bias, it would seem, is lack of optimism. I'm not talking about delusional, starry-eyed optimism, but rather the simple, clear, energetic belief in the potential success of an idea. No business can ever succeed without this factor.
What happens, in the larger scheme of the business economy, when we don't have enough optimism? The present moment happens to provide a telling context. Businesses don't get created. Business investments and loans are withheld. Talented people don't get hired. Good ideas wither on the vine out of reluctance and conservatism and weak buy-in. If lack of optimism is the problem, then what are the key factors and tools for creating it, for inspiring confidence, and for shifting from a predominantly conservative and skeptical mindset to thinking and behaviors that are primarily progressive and exploratory—and fundamentally optimistic?
In an excellent recent article in The Boston Globe, writer Joe Keohane starkly describes our perpetual fascination with, and often wrongheaded reliance on, forecasting in business decision-making. He highlights Denrell's important research and makes this statement: "To look at Denrell's work is to realize the extent to which our judgment can be warped by our bias toward success, even when failure is statistically the default setting for human endeavor."
But what about when this default setting is holding us back? As above, the dangers of cognitive bias with regard to overoptimism and "irrational exuberance" have been well-studied. It turns out that a complementary focus on the nature and dynamics of optimism and confidence, and its constructive necessity, has been neglected. (I'm reminded of the work of social psychologist Todd Pittinsky, who points out our long, exclusive focus on the negative effects of prejudice and how to mitigate these with tolerance, rather than exploring the positive human responses to difference and how to induce and build on these. He and his colleagues have coined this positive phenomenon "allophilia" or "love of the other.")
Clearly, the relevant practitioners for effecting this big and needed shift are leaders. And there have been thinkers who have begun such a complementary exploration into precisely how leaders create optimism, confidence, and even hope, and the very real business effects that result (for example, Richard Boyatzis and Annie McKee in their book Resonant Leadership, or Rosabeth Moss Kanter in Confidence).
But it's just a beginning. As Larry Summers said at an event this past fall, "Confidence is the cheapest form of stimulus." While it may be the cheapest, it is also the most crucial, and for leaders, the hardest to create.