Harvard Business School and the Question of Optimism Bias

All this gloomy economic talk has made concepts such as "transparency" popular, notes Harvard Business School professor James Heskett in a new paper. But evidence suggesting that phophecies are self-fulfilled is raising questions about whether it's a good idea for business leaders to be honest about how bad the future looks.

So what is the appropiate posture for leaders facing gloomy prospects and how closely connected are economics and psychology?

Heskett highlights a new book by Nobel-prize winner in economics George Akerlof and economist Robert Sheeler of "irrational exuberance" fame. These authors cite the importance of what John Maynard Keynes once referred to as "animal spirits" in dealing with economic issues, notes Heskett. The gist is that the more stories we tell about depression, the more likely we are to have one. If one subscribes to this line of thinking, avoiding the use of certain terms like "depression" may make sense.

The logical next question then is, "How frank should leaders be?" Jim Collins emphasizes the importance of organizations facing "the brutal facts" about causes of mediocre performance, notes Heskett. "On the other hand, there may be reasons why good leaders have to have an optimistic bias."

The ability of a naturally pessimistic—or realistic?—CEO to adversely affect everything from market reactions to employee morale and motivation may be substantial, thereby creating the wrong kind of self-fulfilling prophecy. After all, we applaud candor while sometimes penalizing those who pursue it. Just look at President Obama, whose honest assessment of the economy has been rewarded with further deterioration in a number of indicators, not the least of which is the stock market.

Heskett asks, To what degree do leaders owe it to others in their organizations to mask personal negative feelings in an effort to inspire good performance? How, if at all, should leaders employ self-fulfilling prophecies? When does such effort become unproductively deceptive? How frank or deceptive should leaders be?

Big Think would like to know your thoughts as well. Email sean@bigthink.com

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