Delusions of Success How Optimism Undermines Executives' Decisions by Dan Lovallo and Daniel Kahneman. July 2003 issue of The Harvard Business Review Presented by (Henry) Yu Zhaoguo

Business Failures More than 70% of new manufacturing plants in North America close within their first decade of operation. Three-quarters of mergers and acquisitions never pay off.

Human Nature Based on the authors ’ study, most people are highly optimistic.

Executives' optimistic thinking Executives tend to take risk because the rewards of success are sufficiently enticing. Executives would like to exaggerate their personal abilities and overestimate their management skills. They tend to attribute favorite outcomes to their control while unfavorable outcomes are usually attributed to uncontrollable external factors

phenomena of magnifying optimism Anchoring Competitor Neglect Organizational Pressure

Anchoring The initial plan or idea will tend to accentuate the positive side and lead a case toward overoptimism.

Competitor Neglect Executives will often focus on their own capabilities and plans while ignore potential competitors when entering a new field.

Organizational Pressure Internal competitions for an organization ’ s resources exaggerate the positive outcomes. Pessimistic or negative ideas are usually discouraged in an organization.

Outside View The authors believe that Outside View is more objective and reliable

How to Take the Outside View Select a reference class Assess the distribution of outcomes Make an intuitive prediction of the position in the distribution Assess the reliability of the prediction Correct the intuition estimate.

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