When We’re Too Positive

Quick Insight

Optimism can encourage risk-taking that improves your profits. Excessively optimistic managers tend to run cash-constrained companies.

What does it mean to be "too positive?"

Optimism can encourage risk-taking that improves your profits. Excessive optimism blinds you to risks that destroy value.

Entrepreneurs are the classic example of excessive optimism. The vast majority expect to succeed despite statistics that most will fail. "Optimistic martyrs" refers to entrepreneurial companies that fail but signal new markets to stronger competitors. Still, we need people to take the risk to start the companies of the future.

The planning fallacy occurs when managers underestimate the time and money needed to complete a project. These projects often lose money. These managers don't take into consideration past late projects by their company or similar companies. Even if they do, they overestimate their ability to do better this time.

Excessively optimistic leaders tend to run cash-constrained companies. They take on too many projects and mergers that consume cash. At the same time, they are less likely to tap equity funding because they think the valuations of their company by investors are too low. They then use too much debt. Once they are low on cash and maxed out on debt, they pass up good projects because they are unwilling to raise more equity funding.

I wish you a realistic view that can clearly see risk and profit. I wish you well.

- Rob Stephens

Further Insight

CFO Perspective Resources

  • Video: How To Avoid Business Decision-Making Mistakes - I explain some common business decision-making mistakes and how to overcome them.
  •  Course: Behavioral Finance - Overcome your destructive financial impulses by understanding common thinking mistakes. With my Behavioral Finance course, you can avoid these costly financial decision-making mistakes. The course will help you to learn science-backed ideas to make better financial decisions.

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