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Premortem: a partial remedy of overconfidence

Letters live.

Last week I talked about how great it feels to be an optimist (see "It feels great to be an optimist"), and the mindset that comes along with it brings us achievements. Now, it is time for me to smash it into pieces and look at it more realistically.

Projects fail at a spectacular rate. According to data from the Bureau of Labor Statistics (2020), 20% of small businesses fail in their first year, 30% of small business fail in their second year, and 50% of small businesses fail after five years in business. Finally, 70% of small business owners fail in their 10th year in business. In New Zealand, only 37% of ‘micro’ businesses, or start-ups, exist after two years (NZ Business, 2018).

Statistics won't lie, but optimistic entrepreneurs usually think they will be among the 30% successful in their ideas. But unfortunately, overconfidence is probably one of the most significant setbacks for optimists. And those cognitive bias that never goes away in our mind creates blindness toward hidden pitfalls, leading to countless failures of businesses.

You may feel defeated when cold water is poured into your new business dream. But please stick with me for a moment. I also mentioned in my last blog that risk management is a skill, and it can be learned and mastered. Therefore, overconfident optimism can be overcome by training as well.

Daniel Kahneman mentioned "premortem" as a partial remedy to overconfidence. However, the practice of premortem is also straightforward. It is used as a managerial strategy. A project team imagine a project or an organisation that has failed and then work backwards to determine what can lead to the failure of the project or organisation. You can look at a more detailed explanation and execution of premortem from Harvard Business Review and Mckinsey & Company Insight.

An example of "premortem" as part of business plan refinement

It sounds a bit technical, but it is all about making the picture clearer. Sometimes, we are so excited to work on the easy/prominent part of the puzzle and ignore those inconspicuous looks, but it may cause significant troubles in the end. Premortem is a way for businesses to be smart initially and avoid troublesome situations or ultimate failure in the future.

Here, I want to emphasise some key takeaway points about premortem. It is described as "a partial remedy" for a reason. Firstly, You cannot rely on it to figure out all the potential risks and possible outcomes. The future is still unpredictable without the premortem or not.

Secondly, you cannot do the premortem alone. It would all be a "pause" or a "reflection" if you are the only one thinking of the possible reasons for a failure. You are still trapped in your cognitive bias. That is also why I encourage entrepreneurs to find co-founders and play the game as a team.

Thirdly, we can still be blinded to the risks as a group. As brutal as the fact is, even though we are different in many aspects, we sometimes fall into the same thinking pattern when we work on a project together for so long. Therefore, having someone outside of the project team provides an outside view can be a way to crack the dilemma.

Finally, keep on being optimistic and move on. Sometimes, the reality is harsh, but it does not mean you need to give up, and your idea flaws. Thomas Edison failed more than 2,000 times until he finally invented the light bulb. Hence, patience is the remedy to everything.


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