The Power of Premortems: Preventing Investment Failures Before They Happen

A Tale of Two Futures

Imagine it's 18 months from now. Your investment has failed spectacularly. The board is asking tough questions. Your team is demoralized. Your reputation is damaged. And you're wondering how you missed the warning signs that now seem so obvious.

Now imagine an alternative future: You're sitting in your office today, deliberately imagining this exact failure scenario before making the investment. You're systematically identifying potential pitfalls, strengthening your decision process, and potentially saving millions in shareholder value.

This second scenario is the essence of a premortem – one of the most powerful yet underutilized tools in an executive's decision-making arsenal.

Why Smart People Make Bad Decisions (And How Premortems Help)

Our brains, masterpieces of evolutionary engineering, are paradoxically both our greatest asset and our biggest liability in investment decisions. We're equipped with neural machinery that evolved to keep our ancestors alive on the savannah – not to evaluate complex investment opportunities in a modern economy.

This creates three critical blind spots that premortems specifically address:

1. The Optimism Blind Spot

We're naturally optimistic – a trait that helped our ancestors persist through harsh conditions. But in investment decisions, this same optimism can be deadly. Premortems force us to temporarily abandon our rose-colored glasses and see potential failures clearly.

2. The Commitment Blind Spot

Once we start down a path, we're wired to commit. Our ancestors couldn't afford to second-guess themselves when hunting or fighting. But in investment decisions, this commitment bias can lead us to throw good money after bad. Premortems create a structured space for doubt before we're emotionally invested.

3. The Status Blind Spot

Our tribal ancestors knew that challenging the chief could be dangerous. This ancient wisdom still echoes in modern boardrooms, where junior team members often stay silent rather than question a senior executive's pet project. Premortems create psychological safety for surfacing concerns by making criticism part of the process rather than an act of defiance.

The Premortem Process: Simple But Not Easy

Step 1: Frame the Exercise (10 minutes)

Gather your team and say: "We've time-traveled 18 months into the future. Our investment has failed completely. We're not here to defend the investment or argue it might succeed. We're here to understand why it failed."

Step 2: Individual Reflection (15 minutes)

Have each team member independently write down all possible reasons for failure. The key is independence – you want unfiltered individual thinking before group discussion.

Step 3: Structured Sharing (30 minutes)

Starting with the most junior team members (to prevent anchoring on senior opinions), have each person share their failure scenarios. Capture every insight without debate or defense.

Step 4: Pattern Recognition (20 minutes)

Look for patterns in the failure scenarios. Which risks appear repeatedly? Which ones resonate most strongly with different team members' experiences?

Step 5: Strengthening the Investment (30 minutes)

For each major risk identified, develop specific mitigations or decide if the risk is acceptable. Sometimes, the best outcome of a premortem is deciding not to invest at all.

Why Premortems Work: The Science Behind the Method

Premortems work by exploiting three powerful psychological principles:

1. Prospective Hindsight

Research has shown that imagining an event has already occurred increases our ability to correctly identify reasons for future outcomes by 30%. By mentally placing ourselves in the future looking back, we activate different neural pathways than when we try to look forward.

2. Psychological Safety Through Structure

By making criticism part of the process rather than an exception to it, premortems create what psychologists call "psychological safety" – the shared belief that the team is safe for interpersonal risk-taking.

3. Diversity of Thought Capture

Premortems systematically capture diverse perspectives before they're lost to group think. This is particularly valuable because different team members often see different risks based on their unique experiences.

Beyond Theory: Premortems in Practice

Military Parallel

Military planners have long used a similar technique called "red teaming" where a separate group tries to defeat their battle plans. But while red teaming requires dedicated teams and significant resources, premortems can be done quickly with existing team members.

A Simple Starting Point

If you're new to premortems, start with these three questions:

1. "What are we missing?"
2. "What will we wish we had known?"
3. "Why might we regret this decision?"

Even this simplified version can dramatically improve decision quality.

The Cost-Benefit Equation

Let's be clear-eyed about the costs: A good premortem takes 2-3 hours of your team's time. For a $50 million investment decision, that's about 15 person-hours of senior executive time.

But consider the benefits:

• Early identification of fatal flaws
• Better risk mitigation plans
• Stronger team alignment
• Enhanced decision quality
• Improved organizational learning

The real question isn't whether you can afford to do a premortem. It's whether you can afford not to.

Conclusion

You can continue making investment decisions the traditional way, relying on optimistic projections and hoping for the best. Or you can spend a few hours systematically stress-testing your thinking through a premortem.