At the core of Entrepreneurs' Organization (EO)'s mission is an unrelenting commitment to helping entrepreneurs learn and grow in every stage of business. Dr. Gleb Tsipursky, CEO of Disaster Avoidance Experts, author of Never Go With Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters, and a recent EO 360° podcast guest, empowers leaders to avoid business disasters by addressing potential threats, maximizing unexpected opportunities, and resolving persistent personnel problems. We asked Dr. Tsipursky to explain how to avoid the dangerous error of underestimating the likelihood of catastrophes. Here's what he shared:
Due to the grounding of its 737 Max airplane following two deadly crashes that killed 346 people, Boeing lost $5 billion in direct revenue by ?July 2019. Investors valued the overall losses--ranging from damage to the brand to losing customers--at over $25 billion by March 2019. In October, new revelations about 737 Max problems exacerbated the company's losses. In late December, Boeing fired CEO Dennis Muilenburg due to the 737 Max fiasco.
What led to this disaster for Boeing? On the surface, it came from Boeing's efforts to compete effectively with Airbus's newer, more fuel-efficient Airbus 320. To do so, Boeing rushed the 737 Max into production and misled the Federal Aviation Administration (FAA) to gain rapid approval. In the process, Boeing failed to install safety systems that engineers pushed for and failed to address known software bugs in the 737 Max--glitches that resulted in the eventual crashes.
The new normal
These surface-level issues had a deeper cause. Ironically, the transformation of the airline industry in recent decades to make airplanes much safer and accidents incredibly rare is key to understanding Boeing's plight.
Boeing's leadership suffered from what cognitive neuroscientists and behavioral economists know as the normalcy bias. This dangerous judgment error causes our brains to assume things will keep going as they have been--normally. As a result, we drastically underestimate both the likelihood of a disaster occurring and the impact if it does.
Boeing's 737 Max disaster is a classic case of normalcy bias. The company's leadership felt utter confidence in the safety record of its planes produced in recent decades--deservedly so, according to crash statistics. From their perspective, it would be impossible to imagine that the 737 Max would be less safe than its other recent-model airplanes. They saw the FAA certification process as simply another bureaucratic hassle getting in the way of competing with Airbus, as opposed to ensuring safety.
Think only big companies are prone to this mindset? Think again.
Normalcy bias is a significant factor behind bubbles: in stocks, housing prices, loans and other areas. It's as though we're incapable of remembering the previous bubble, even if it occurred only a few years ago.
Normalcy bias in a tech startup
Of course, normalcy bias hits mid-size and small companies hard as well.
While conducting a recent training for small and mid-size company executives, I met Brodie, a tech entrepreneur who shared the story of a startup he founded with a good friend. They complemented each other well: Brodie had strong technical skills, and his friend brought strong marketing and selling capacity.
Things went great for the first two-and-a-half years, with a growing client list--until his friend was badly injured in a motorcycle accident, leaving him unable to talk. Brodie had to deal not only with the emotional trauma, but also with covering his co-founder's work roles.
Unfortunately, his co-founder failed to keep good notes and didn't introduce Brodie to his client contacts. In turn, Brodie--a strong introvert--struggled with selling. Eventually, the startup burned through its cash and closed.
Normalcy bias is one of many dangerous judgment errors that researchers in cognitive neuroscience and behavioral economics call cognitive biases. Fortunately, recent studies show how you can use pragmatic strategies to address these dangerous judgment errors in your professional life.
Preventing normalcy bias disasters
With normalcy bias in particular, it helps to use the strategy of considering and addressing potential alternative futures that are much more negative than you intuitively feel are likely. That's the strategy that Brodie and I explored as he prepared to return to the startup world.
Brodie wanted to avoid the previous problems he experienced. So, we discussed the best practice of creating systems and processes from the start that enable each co-founder to back up the other in emergencies, such as keeping good notes and introducing each other to important contacts.
So what are the broader principles here?
- Be much more pessimistic about the possibility and impact of disasters than you intuitively feel or can easily imagine.
- Use effective strategic planning techniques to scan for potential disasters and try to address them in advance, as Brodie did with his plans for the new business.
- Of course, you can't predict everything, so retain some extra capacity in your system-- time, money and other resources--that you can use to deal with unknown unknowns, also called black swans.
- Finally, if you notice even a hint of a disaster, react much more quickly than you intuitively feel that you should.