caution tape

The Dangers of Excessive Optimism

People who see themselves as successful are especially susceptible to overconfidence. Business owners often fall into this category, knowing how optimism has served them well as entrepreneurs. But in uncertain times like these, it’s doubly important not to get carried away betting on best-case scenarios.

In practical terms, this means that owners should plan for scenarios that include losing a third or more of their revenues in the near term, even those that have been generated by historically reliable clients. Many companies are conscious of managing cash flow, but fewer are considering that they may need to depart substantially from their existing business models to make money.

An article posted on the financial industry blog Naked Capitalism connects the dots in a way that accounts for the increased risk of a substantial downturn in business. Notably, it quotes from a recent Wall Street Journal article which details how restaurants, retailers, hotels, and other companies from Medtronic to Vox Media are recalibrating their time horizons:

“Executives who were bracing for a monthslong disruption are now thinking in terms of years. Their job has changed from riding it out to reinventing. Roles once thought core are now an extravagance. Strategies set in the spring are obsolete.”

The extra degree of caution needed also applies to underlying expectations regarding the prognosis for and timing of a vaccine. Experts have expressed some confidence that a vaccine is forthcoming in 2021 and that some of the preliminary experimental results have been promising. It is easy, however, to fall victim to a confirmation bias and ignore stories like this recent article in the San Francisco Chronicle which cites researchers at UCSF with concerns that people are shedding antibodies to COVID-19 too quickly to make a virus practical (full text available via the Benicia Independent). A vast majority of people are rooting for an effective vaccine, which is why we need to be mindful of the possibility that reality won’t conform to our hopes.

None of this information is meant to engender a sense of hopelessness. The unfortunate reality is that, while many sophisticated corporations are taking steps to weigh the risks of undesirable scenarios, many law firms and other professional services firms are not. We wrote early on in the pandemic about the importance of humility. COVID-19 has lasted far longer than most of us predicted in March and April. That fact alone suggests that law firms in particular need to do a better job of examining options and strategies that even a short time ago may have seemed unnecessary.