Excessive pessimism is as blind to reality as excessive optimism
My MBA class this term, instead of dragging us all into a classroom and forcing us to listen to lectures, is based around an online marketplace simulation — something like if the creators of Sim City decided to create Sim Startup. We’re at the point in the game where our company needs venture capital, so we’re selling shares of our company in order to raise money. And the question is, how much is a share of our company worth?
Well, that answer depends on a lot of things. How much money do we have now? How many other assets do we have now? How much money will we have in 90 days? How many sales will we make? How much will we spend? All kinds of things that we may or may not know the answer to.
Business Requires Guesses
So you make a guess. In Risk Analysis, I discussed making a low, a high, and a medium guess.
The Pessimist assumes that the low guess is accurate.
The Pangloss assumes that the high guess is accurate.
The Realist assumes that the middle guess is most likely to be accurate, but is prepared for any of the three.
Pessimism is not Realism
Pessimists like to justify themselves (and obliquely attack you) by calling themselves “realists”. But in fact, pessimists are just as blind to reality as optimists are — sometimes more so.
Sometimes bad things happen. Pessimists understand that.
Sometimes good things happen. Pessimists forget, ignore, or disbelieve that part. And by doing so, they miss out on a lot of opportunities.
Both bad and good are part of reality. So a realist must take both into account. A realist must be prepared to bail if things go badly, and must be prepared to run with success if things go well.
An Object Lesson
Early in this term, our company decided not to spend money to increase our factory capacity. It was felt that we should have extra money on hand, in case bad stuff happened.
When we went to market that quarter, our brand was enormously popular. We had 75% market share — everyone wanted our products. But we were only able to provide a few of them: of the 265 who wanted our brand, 182 of them walked away empty-handed. Our company was so prepared for the bad stuff that we weren’t prepared for the good stuff. We lost hundreds of thousands of dollars in sales, and made our potential customers very angry.
Pessimism is not always the best approach.