Optimism bias: Why owner-CEOs often underestimate risk

Optimism bias is the tendency to rate good outcomes as more likely than they are — and bad outcomes as less likely. It's the same belief in the future that made you start the business in the first place. The problem is that it also makes it harder to see the signals pointing the other way. In owner-CEOs, the bias is often stronger than in hired CEOs, because there are fewer people in the room to challenge it. The result is often slow decisions, underestimated risks, and explanations like "it'll correct after the summer" — quarter after quarter.

It isn't necessarily a weakness

You have to be an optimist to start and run a business. If you looked at probabilities like an actuary, you'd never have started. Optimism bias isn't a flaw to be eliminated. It often distorts how risk gets assessed. The problem starts when optimism starts shaping decisions.

The problem starts when optimism changes what you notice. Three customers don't renew. Two cancel. One complains. You notice the customers who stayed and find explanations for the ones who left. Not because you're lying — your brain naturally gives more weight to information that confirms your worldview than information that contradicts it.

Why owner-CEOs are especially exposed

There are typically three reasons. None of them is about you as a person — all of them are about the role.

First: no one in the room who actually challenges you. A hired CEO has a board that can fire him. The owner-CEO has a board he chose himself. Most owner-CEO boards are made up of people who backed the strategy — not people who challenged it. That means the optimistic scenario never gets seriously challenged.

Second: the capital is your own. When you stand to lose several million of your own money by admitting the plan isn't working, you'll unconsciously look for evidence that it still is. McKinsey describes excessive optimism as one of the biases that most often leads leadership teams into poor decisions.

Third: identity is bound up with the business. Admitting the strategy is wrong isn't just a financial decision — it's a statement about you. People tend to believe their own situation is different from everyone else's. Owner-CEOs often carry a lot of that mindset. It works right up until the moment it blocks you from seeing reality.

Example — one explanation per quarter

A typical mid-sized manufacturer, around 60 employees. Q1: revenue is 8 percent under budget. The owner-CEO explains it as "a large order pushed into Q2". Q2: the order arrives, but the margin on the rest is lower. "We'll raise prices in the autumn." Q3: the price increase is through, but two of the largest customers are now in talks with a competitor. "We've won them back before." Q4: one of the two is gone. The other demands lower prices to stay.

Over a year, the owner-CEO has had four explanations. Each one was plausible on its own. Together they told one story: the pipeline is weaker, margins are lower, customer relationships are becoming weaker. But because each explanation appeared separately — one per quarter — he never saw the whole picture.

It isn't laziness. It's bias doing exactly what it normally does: turning every problem into a separate explanation, so it never becomes a pattern.

How to recognise it in yourself

Optimism bias is hard to see because it feels like ordinary optimism. Three signs optimism is starting to shape your decisions:

1. You've used the same explanation three quarters in a row. "It'll correct after the summer." "It'll correct after Christmas." "It'll correct in Q2." If the explanation stays the same but the date keeps moving, it isn't an explanation any more. It's usually a defence mechanism.
2. You explain good numbers with strategy and bad numbers with external conditions. When revenue beats budget, it was your work. When it misses, it was the market, the currency, the weather. That difference is often the signal.
3. You haven't worked through the bad scenarios. You have a detailed three-year budget for the growth case. You have no plan for what you do if revenue falls 15 percent over 12 months. That imbalance is the bias in its simplest form.

5 moves that reduce optimism bias

1. Write the bad scenario down in the same detail as the good one. If your budget has one version, you haven't tested it. Two versions — base case and downside case — force you to think through what you'd actually do if it goes the other way.
2. Find one person who is allowed to say what you don't want to hear. A former CFO. A board chair who doesn't hold equity. An advisor from a turnaround programme. Their job isn't to agree — it's to challenge the assumptions.
3. Put numbers on the downside, and when you'll notice it. "If revenue falls 12 percent over two quarters, then …". If you can't fill in after "then", you have a plan that only works in the good scenario.
4. Run a pre-mortem before any major decision. Imagine the decision has failed 18 months from now. Write down why. It forces you to make the risk concrete while you still have time to do something about it.
5. Compare your own forecasts with your own track record. How often have you hit budget the last three years? If you've missed budget most of the last three years, your next forecast is probably too high too. Adjust it down before the lender or the board does it for you.

The honest test

Three questions. Answer without checking the spreadsheet first:

1. What's the worst explanation you've given yourself in the last 12 months that later turned out to be wrong?
2. Which number in the business are you avoiding because you know what it will show?
3. What would an outside board chair ask about your last quarterly report — that you skipped over yourself?

Most owner-CEOs have an answer to question 1. Many have an answer to question 2. Few have a good answer to question 3. That gap is often where the real issue starts.