How Optimism Bias Can Undermine Your Business and Management Success

Trabajadores de una startup
Reunion en una oficina de un startup. Hero Images

Eighty percent of the population suffers from optimism bias. Suffering, however, is not the word you use when you think about optimism. Instead, you may think of visualization and the power of positive thinking and determine that optimism is a positive way to view a situation.

Optimism is good, but it can also become a terrible issue for your business. Here's what you need to know about optimism bias.

What Is Optimism Bias?

When you over-predict success and under-predict failure, that's optimism bias. Professor of Cognitive Neuroscience at University College London, Tali Sharot explains optimism bias as a phenomenon in which “we overestimate the likelihood of positive events, and underestimate the likelihood of negative events.” A few examples of optimism bias include:

  • Underestimating the chances of getting divorced
  • Underestimating the chances of being in a car accident
  • Underestimating the chances of suffering from cancer
  • Overestimating your life span
  • Overestimating workplace success
  • Overestimating one’s children

While it may be human nature to look at life and new business plans from a lens of optimism, that optimism bias can hurt your business.

The following are several ways in which optimism bias can adversely affect your business—and suggestions about how you can overcome optimism bias is each.

Hiring Mistakes

Having an optimism bias at work can skew your understanding of workplace reality. If you overestimate your own success in the job market, that may also cause you to think that you're success is due to hard work. With that mentality, it’s easy to project the idea that if hard work led to your success, another person is unemployed because they didn't work hard enough.

Your optimism over-estimates your chances of success, and you apply this to another person. Doing this may cause you to pass up on an otherwise good candidate for your job if that person is unemployed.

Another form that optimism bias may take in hiring is applicable to your own skills. The average full-time recruiter hires to fill 54 positions per year, but the average hiring manager will hire far fewer. If you’re acting as the hiring manager and you believe that your hiring skills are above average, you may ignore the advice of an actual hiring expert. Your own optimism bias may make you believe that you're better at hiring than you are, which will impact the quality of your team in the long run.

How to Fix Your Hiring Mistakes

  1. Acknowledge your own bias. Just as unconscious bias can creep in when you think about race or gender, optimism bias can creep in and convince you that you are an above-average hiring manager. Acknowledge that it's possible that you may think you're better at hiring than you actually are.
  2. Take advice from actual experts. Whether this is an experienced recruiter or another manager who has an excellent hiring track record, seeking advice can help give you clarity when you decide between candidates. 
  3. Make objective criteria that you grade all candidates against. Having documented reasons and standards not only helps you see clearly, but can protect you from all unconscious biases.

Business Failures Reflect Unconscious Bias

According to a 2017 study, almost half of all small businesses fail by their fourth year. Is your company on-trend to follow this path, or will yours be one of the successful ones? Your optimism bias may tell you that yes, yours will be successful. But, if you don't acknowledge that failure is common, you may not prepare properly for the possibility of failure.

42% of new businesses fail because there is no market need for their product, and this may be an example of optimism bias.This is a considerable number of people who either didn't do proper market research or believed their product was better than the research showed. 

Their research may also have shown that a market need existed and that bad research resulted in false hope. 

If you believe that your business will perform above average, you may end up failing.

How to Fix Business Failure 

You will never have a 100% guarantee that your business will succeed indefinitely, but the first key is looking at the potential market. You may love your product, but it's critical that the market loves your product too.

Spend your time doing due diligence before investing your time and money into the new business, learn why other businesses in this field have succeeded and failed, and look closely at the failures.

Managing Employees With Optimism Bias

If you find yourself thinking, "It will all work out," whenever a problem comes up, your optimism can hurt your business. Sometimes the issue may work out, but often you need to address employee mistakes with feedback and performance improvement plans. Employees—even those you've carefully handpicked—may show up dressed inappropriately, harass another employee, or embezzle from your company.

If you assume things will always resolve themselves and that you've hired perfect employees, that's optimism bias striking again.

How to Manage Employees Without Optimism Bias

Of course, you want to have a positive attitude and treat your employees kindly, but this is not the same as having unwarranted optimism. Before you hire your first employee, create a professional employee handbook that gives clear guidelines for everything from vacation accruals to dress codes. 

Ask an employment law attorney to check the handbook for legality, enforceability, and fairness based on what they’ve experienced with other employers.

When a problem pops up, address it head-on. You can do so nicely, but don't ignore it. It’s also extremely important that you don't tolerate any harassment or other inappropriate behavior, fire bullies, and listen carefully to your employees—if they tell you a problem exists, don't let your own love for your business blind you. Listen to the facts and then decide.

Bottom Line

Optimism is useful—without it, you would never chase your dreams. But don't become too biased. Think through issues thoroughly, listen to experts, and set clear guidelines for yourself and for your employees. Then, you can let your optimism help you—not hinder you—in your business success.