- Trustees sometimes can have an overly optimistic view of the colleges and universities they serve. Unfortunately, optimism bias can impact board decisions. Specifically, when looking at the financial health of the institution, optimism bias can be detrimental.
- When boards continue to approve budgets that assume enrollment and revenue increases despite past performance that has consistently delivered flat or declining enrollment and revenue, underpinning the reason cited is the cognitive fallacy of optimism bias whereby decision makers overestimate the likelihood of experiencing positive results and underestimate the likelihood of experiencing negative results.
- Failure to recognize an institution’s problems because of optimism bias, followed by blaming external factors, contributes to exacerbating the problems as assets dwindle and reputations erode.
- Understanding that college and university boards of trustees are particularly susceptible to optimism bias is a good start towards inoculating a board against it. Healthy, realistic optimism is always welcome, but unrealistic and unsound optimism is nearly always toxic and should be vigorously challenged in light of all of the profound challenges facing higher education in general, small private institutions are the most vulnerable.
- Trustees need to understand what the risks of optimism bias are and learn to identify if optimism bias is a factor on their board. Understanding how optimism bias could affect decision making is essential for boards to make the best decisions to foster the future success of their institutions.
Even casual observers of U.S. higher education are aware that the sector is deeply challenged, particularly small, private colleges. A looming demographic cliff is just around the corner, with the number of high school graduates set to peak in 2025 and then fall by as much as 15 percent over the next few years. Costs continue to soar and student loan debt burdens loom over recent graduates for the rest of their lives, putting out of reach such hallmarks of the American dream as buying a home, leading many students and parents to question whether a college degree is even worth it.1 Today, there are plenty of alternatives to a four-year degree from a traditional brick-and-mortar college or university. For example, for-profit institutions and online behemoths such as Western Governors and Southern New Hampshire universities enable students to pursue a degree while working full-time or to earn stackable short-term credentials that prepare students for the workforce. Also, tech companies such as Google offer career certificates in the high-demand fields of cybersecurity, data analytics, digital marketing, and e-commerce.
Yet, despite this common knowledge about the challenges facing higher education, those on the inside with far greater access to information—presidents and trustees—largely appear nonplussed by these accounts of challenges to the very business model of higher education, at least when it comes to their own institutions. On the heels of one of the most calamitous years for higher education, 8 out of 10 college presidents responding to the Inside Higher Ed 2021 Survey of College and University Presidents said that they were confident that their institutions would be financially stable over the next 10 years.
The optimism of presidents and boards about the financial strength of their own institutions is truly limited to just them. The most recent Forbes 2023 College Financial Grades: The Nation’s Strongest and Weakest Schools report certainly sees things differently, pointing to the vast amounts of federal assistance during the pandemic as the source of false hope that merely postponed the inevitable. For the past decade, scholars, journalists, and pundits have been singing, in perfect harmony, a somber song about the future of higher education with exhortations to “change or die”2 and predictions that half of U.S. colleges and universities would go out of business by 2030.3 Clayton Christensen was certainly at the extreme end of pessimism toward higher education, but even the more measured sentiments of such noted scholars of higher education as Nathan Grawe and Robert Zemsky align much more closely with Christensen than with the college presidents surveyed by Inside Higher Ed.
Is the optimism of insiders due to information they have that outsiders—such as faculty, staff, students, and parents—simply don’t have, or is there something else to it? Besides, what’s wrong with leaders of colleges and universities being optimistic about the future? After all, most of us have been encouraged to “reach for the moon because even if you miss, you’ll land among the stars.” Unfortunately, misguided optimism among those who set and approve budgets can have calamitous consequences, particularly for private, tuition-dependent institutions lacking the backstop of a large endowment.
The primary problem with approving an overly optimistic budget is that the expense level is set on the premise of the projected enrollment and revenue level. If the projected revenue level fails to materialize—whether from lower enrollment and/or a higher-than-expected discount rate—it is extremely difficult to cut expenses even when it is obvious that there will be a deficit. Most of the costs in higher education are fixed, including labor—particularly faculty. Higher education simply can’t engage in mass layoffs like many big tech companies did in 2023 to quickly stem losses.
A far too common experience among boards of small, private, tuition-dependent colleges goes something like this:
- February or March: Sitting through the presentation of a budget predicting unprecedented enrollment growth, asking a few questions about the assumptions supporting the projected growth, looking at one another and satisfyingly nodding heads in agreement, and enthusiastically and unanimously voting to approve the budget.
- May or June: Finding out that the early indicators for fall enrollment are not what the administration had hoped for, though they remain hopeful and don’t see cause for alarm. Besides, this isn’t the time for concern; quite the contrary, it’s time for celebration…it’s commencement season, which for most trustees, is the apotheosis of the trustee experience: mingling with students, wearing one’s gown and hood, sitting on the dais, being recognized by the president and applauded by the audience. Amid all of this pomp and circumstance, how could there be anything to worry about?
- August or September: With the numbers for fall semester more or less final, learning that enrollment is substantially lower than budgeted. The admissions and enrollment vice presidents assure the board that their teams are working on a good number of last-minute deposits that will improve the enrollment numbers. Once again, they remind the board that transfer students tend to decide much later than entering freshmen, so there’s still hope there.
- November or December: Realizing that the numbers are what they are, and the budget that was approved eight or nine months earlier was clearly overly optimistic and a significant deficit is inevitable. At this point, the only action that can be taken is deciding how to finance the deficit. It’s far too late to try to cut any costs, and of course, very few costs can be cut in the short term as nearly all of the expenses are fixed.
- Next February or March: Rinse and repeat.
Of course, this scenario is a broad and reductive generalization. But many of the trustees—particularly those from small, private, tuition-dependent colleges—are reading this and nodding their heads thinking, “Yeah, this tracks.” For how many years can a board repeat this cycle before an institution finds itself on the brink?
With a nod to Ernest Hemingway (in describing going bankrupt in his 1920 novel, The Sun Also Rises), colleges and universities tend to go broke slowly and then all at once. Although an institution’s decline is obvious to any observer comparing financial statements or Integrated Postsecondary Education Data System (IPEDS) data from year to year, action by the board tends to be deferred to the next year and then again to the following year. “Colleges and universities do not suddenly blow up. Even when they literally burn to the ground overnight—as many have, sometimes more than once—most find a means to carry on.”4 Colleges and universities with broken business models can operate years after a similarly beleaguered business would have dissolved.5
Boards of trustees are full of highly accomplished, and in many cases, celebrated individuals. The archetypal trustee is an accomplished mid- to late-career professional who has had significant success in a field other than higher education, typically business or law, who has some connection to the institution—alum, parent, donor, or community partner. Why would a group composed of such august members stand by and preside over the decline of their institutions? It’s unlikely to be due to a lack of skill. Although most trustees lack experience in higher education, they tend to know their way around financial statements. It’s also unlikely to be due to a lack of care or concern for the institutions. Trustees contribute generous amounts of time and money to their schools because of their passion and even love for them.
If the love of their university is inextricably linked purely to memories and traditions, that can lead board members to “drive with the rearview mirror making decisions influenced by emotional ties to the past rather than clear-eyed assessments of current difficulties and informed financial modeling.” Trustees who are alumni of the institution (typically just over half of board members of public and private boards) tend to be particularly tied to the past and prone to what Terrence MacTaggart called “magical thinking,” believing that doubling down on what worked when they were students 20 or 30 years ago is the path to prosperity in the future.6
Optimism Bias
When boards continue to approve budgets that assume enrollment and revenue increases despite past performance that has consistently delivered flat or declining enrollment and revenue, underpinning the reason cited is the cognitive fallacy of optimism bias whereby decision makers overestimate the likelihood of experiencing positive results and underestimate the likelihood of experiencing negative results. It can make board members govern their institutions in a way far differently than they would run their businesses.
For example, St. Joseph’s College of Indiana closed in 2017. The board was fully aware that enrollment had been shrinking year over year and that they had, at best, five years of runway before they would exhaust all available resources. Nevertheless, the board authorized “spending money hand over fist…growing the college.”7 The 2016 budget included $3.5 million more in spending than in the previous year, signaling to the campus community that the college was in good shape—and a year later, the board announced that the college was ceasing operations. The board was blinded by optimism bias, which contributed to their demise.
Optimism bias is as mixed a blessing as the term suggests. Optimistic individuals have an outsized role in shaping society. It takes an enormous amount of optimism to start a business, toil in a laboratory seeking new findings, or run for high political office.8 People doing so are likely to be optimistic by temperament as well as overconfident in their abilities to control events in areas outside of their domain of expertise. Risk-takers tend to underestimate the odds they face, and even when they know the odds, they tend to believe that their ability is more than enough to beat them. The stock market tends to identify optimism bias efficiently. When CEOs (and the boards) of public companies undergo large, risky mergers and acquisitions, the stock market frequently responds by downgrading the stock of the acquiring company, as the evidence is abundantly clear that many mergers and acquisitions destroy shareholder value.
College and university boards of trustees are breeding grounds for optimism bias. First, they tend to be composed of members who are highly optimistic by temperament. As mentioned earlier, those in positions of influence in society are commonly people who have taken big risks and been rewarded for them. Boards of trustees that are made up of business titans, legal moguls, and elected officials are more likely to be inclined to believe that their institutions can beat the odds, just as they have in their professional lives. While they understand and accept that higher education, in general, faces significant headwinds, they’re inclined to believe that “whatever risks may be facing other schools, the future for my college is bright.”9 And herein lies the big problem with optimism bias in college and university boards.
Optimism bias can lead to a systematic fallacy in planning and decision-making known as the planning fallacy.10 Decision-makers tend to underestimate costs, completion times, and risks, while overestimating the benefits.11 The root cause of the planning fallacy is taking an “inside view,” focusing on the specifics of a plan or budget rather than focusing on similar plans or budgets of other projects that are already completed. The inside view of a board full of individuals temperamentally oriented toward optimism and with a much higher than average tolerance for risk is particularly inclined to believe that their view is fundamentally sound and correct.
College and university boards have several factors that make them more susceptible to optimism bias than corporate boards:
- Incentives. Corporate board members’ incentives are tightly aligned with the organization’s mission (part of which is almost always profit maximization). Board members are paid in both cash and equity in the business, thus aligning their interests with the CEO’s and contributing to clarity about the organization’s planning and budgets. College and university board members are volunteers, and their motivations and incentives are very personal but frequently tied to preserving the traditions of the institution. This historical perspective can cause board members to romanticize the past and see the present through rose-colored lenses.
- Deference to the president. It’s only natural for board members to be deferential to the president. After all, the board hired the president, so the president is a reflection of the board. Furthermore, board members are consistently reminded that their job is governance, not management. They hired the president to run the day-to-day operations of the institution, and they should stay out of the president’s way. A healthy relationship between the board and the president is key to the success of the presidency.12 The fiduciary duty of loyalty also implies an obligation to support the president. However, boards of trustees commonly continue to support a poorly performing president for far too long until they have become objectively unfit: “Back ’em until you sack ’em.”13
- Information asymmetry. Because their work is volunteer and part time, many board members’ awareness of what is going on at their campus and in the broader landscape of higher education stems exclusively from reports and updates provided by the administration at quarterly board meetings. Information asymmetry can also lead board members to believe that problems such as declining enrollment and budget deficits are not a symptom of institutional weakness but of randomly occurring events unrelated to institutional effectiveness and executive leadership.14 Without overt effort on the board’s part, the inside view is likely to be their only view.
When a president presents a budget to the board of trustees, the inertia created from the confluence of these factors all but guarantees its approval, regardless of the soundness of the numbers.
Optimism bias and the resulting planning fallacy can be mitigated by “reference class forecasting” whereby decision-makers find a reference class of similar projects, allowing them to develop an “outside view” of their project.15 The outside view is almost certain to be less optimistic than the inside view. If a board diligently examines its peers (particularly small, private, tuition-dependent institutions), it is much more likely that they will not see growing enrollment and healthy bottom lines, which can temper the optimism of the inside view and inform a more realistic budget.
The importance of a board of trustees approving a budget with realistic revenue expectations cannot be overstated. Once the revenue level is set, the expense level to support that expectation is set for the year, and it is difficult, and sometimes impossible, to cut expenses if the revenues do not materialize. By taking the inside view and approving unrealistic revenue expectations, boards breach their fiduciary duty, as they implicitly approve spending money that they do not have. A board relying purely on its inside view year over year is tempting the fate of St. Joseph’s of Indiana.
Warning Signs
Too often, boards wait to address their problems until they face a true crisis.16 However, there are warning signs that institutional leaders can heed to avert a full-on crisis. James Martin, James Samels and Michael Townsley highlight indicators of an institution at risk such as overdependence on tuition, a meager endowment, excessive deferred maintenance, difficulty rolling over debt, bond rating downgrades, weak alumni participation, declining enrollment, an increasing discount rate, and a yield significantly lower than competitors.17
Heeding the early warning signs of financial distress is one of the most important steps in getting an institution back on track.18 Delays in addressing problems, at best, defer the beginning of a turnaround and, at worst, threaten the possibility of turning around. A board blinded by optimism bias will not be able to see these warning signs, perhaps, until it is too late; and then, when they do, they often blame external factors.
Blaming External Factors
At some point, problems can no longer be ignored and must be addressed by the administration and the board of trustees. Problems facing an institution can be either internal or external. Examples of internal problems are deferred maintenance, discount rates, and management problems. External examples include the recession of the early 1990s, the financial crisis and the Great Recession of 2008–2009, the looming demographic cliff, and the pandemic. Boards suffering from optimism bias are inclined to blame institutional decline on external factors, even though external forces are rarely the root cause of decline.19
Terrence MacTaggart encourages trustees to ask themselves the following questions when executive leadership is describing an institution’s decline: (a) Do reasons for failure lie outside the control of the school and its leadership? (b) Is the board told that current problems are part of a down cycle or trend and that time and patience will resolve them? (c) Are board members told that a silver bullet will soon resolve the current crisis—a generous new donor, a new marketing campaign, a single new program? (d) Do champions of keeping a failing president point to past accomplishments or loyalty rather than current performance?20
Failure to recognize an institution’s problems because of optimism bias, followed by blaming external factors, contributes to exacerbating the problems as assets dwindle and reputations erode.
The COVID-19 Pandemic
As a recent, dramatic, and lingering external threat, COVID-19 deserves individual scrutiny. It created an existential threat for small, private, tuition-dependent colleges whose primary distinctions were their leafy campuses, small classes, and personal touch. These types of institutions were particularly ill-suited to quickly move all of their classes online, and they struggled mightily. However, too many boards of trustees found (and still find) the pandemic to be a convenient scapegoat for their institutions’ enrollment and financial struggles.
Certainly, some institutions’ enrollment challenges were due to the pandemic, and community college enrollment was absolutely decimated by it. Yet, most colleges and universities ended up being better off financially than they were before the pandemic due to the federal assistance they received.
According to a Forbes article: “Lingering Covid stimulus money, and rising stocks in 2021, gave a temporary financial boost to scores of zombie private colleges. Some of the weakest colleges have embarked on desperate strategic pivots but few will likely succeed.”21 While it was likely never entirely true, if your school’s financial problems are still being blamed on the pandemic, it’s a MacGuffin that is distracting board members from reality and contributing to optimism bias.22 Of course, that money is no longer there, so if pandemic assistance funds were balancing your budget, welcome back to deficits.
Higher Ed Financial Statements Aren’t the Same as Business Statements
One cause for undeserved optimism is the financial statements presented to boards a handful of times per year. The balance sheet of an institution in decline can appear, from a distance, to be quite healthy. If you simply look at the net assets line on the balance sheet, for many failed colleges and universities, that figure appeared to be quite robust even on their last day. There are two basic reasons for this: (1) most of the assets of a college or university are tied up in real estate that is very difficult, if not impossible, to monetize, or (2) the utilization of assets are restricted for scholarships, faculty positions, or research, and can’t be touched to fund operating expenses.
Questions for Trustees to Ask
Understanding that college and university boards of trustees are particularly susceptible to optimism bias is a good start towards inoculating a board against it. Healthy, realistic optimism is always welcome, but unrealistic and unsound optimism is nearly always toxic and should be vigorously challenged in light of all of the profound challenges facing higher education in general, small private institutions are the most vulnerable. If your institution fits the profile of those that are the most challenged, board members should be asking themselves the following questions:
- How many of the warning signs are present at my institution? If the answers to those questions aren’t obvious from the standard board materials provided by the administration, ask, or if you must, demand the information necessary to answer these questions.
- Are the reasons for decline or stress being blamed on external factors, particularly the pandemic?
- Are the remedies proposed for these external factors wistful, quick fixes such as a new degree program, marketing campaign, website, or logo, or a large donation?
- What would our budgets for the past few years look like without pandemic assistance funds?
- Is the budget that is being presented for approval projecting unprecedented growth in enrollment or fundraising?
- When evaluating the president, is the board consistently excusing current performance by pointing to accomplishments that are far in the past?
- How much unrestricted cash and cash equivalents do we have?
- What assets can be monetized and how quickly?
- Are we comparing ourselves with the appropriate reference class of like institutions to form an outside view?
Being a trustee of a college or university is a profound honor and privilege that comes with tremendous responsibility. “Collectively, governing boards have the power to build or destroy the educational institutions they serve.”23 A big part of the joy that comes from being a trustee is being a part of a campus community bustling with bright young people brimming with enthusiasm and full of potential. It’s only natural to be optimistic about the future of an organization whose mission is to help students achieve the upper limits of their potential. However, to fulfill their fiduciary duties and make sure that their institutions can thrive for many future generations, board members must vigorously guard against optimism bias and make sure that the major decisions they make are informed by an outside view.
Mike Bills, PhD, is president of AtlasRTX, which uses conversational artificial intelligence to engage prospective students, leading to more applications and higher yield. Bills is a trustee emeritus at Westminster University in Salt Lake City and a member of the Antioch University Board of Governors.
1. William Bennett and David Wilezol, Is College Worth It? A Former United States Secretary of Education and a Liberal Arts Graduate Expose the Broken Promise of Higher Education (Tennessee: Thomas Nelson, 2013).
3. Doug Lederman, “Clay Christensen, Doubling Down,” Inside Higher Ed, April 28, 2017, https://www.insidehighered.com/digital-learning/article/2017/04/28/clay-christensen-sticks-predictions-massive-college-closures.
4. Virginia Sapiro, “When the End Comes,” Boston University Blogs, http://blogs.bu.edu/vsapiro/files/2019/02/SapiroWhentheEndComes2019–1.pdf (2019).
5. Ruth Cowan, “Prescription for Small-College Turnaround,” Change: The Magazine of Higher Learning, 25, no. 1 (February 1993).
6. Terrence MacTaggart, “Nontraditional Presidents: A New Wave of Enterprise Leadership, Trusteeship, 2018, https://agb.org/trusteeship-article/nontraditional-presidents-a-new-wave-of-enterprise-leadership/.
7. Dave Bangert, “Saint Joseph’s closing no surprise?” Journal & Courier, February 11, 2017, https://www.jconline.com/story/opinion/columnists/dave-bangert/2017/02/10/bangert-saint-josephs-closing-no-surprise/97709458/.
10. Dan Kahneman, “New Challenges to the Rationality Assumption,” Journal of Institutional and Theoretical Economics 150, no. 1 (1994): 18–36.
11. Bent Flyvbjerg, “Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class Forecasting,” European Planning Studies 16 (January 2008); Daniel Kahneman, “New Challenges to the Rationality Assumption,” Journal of Institutional and Theoretical Economics 150, no. 1 (1994).
13. Jose A. Cabranes, “Myth and Reality of University Trusteeship in the Post-Enron Era,” Fordham University Law Review 76, no. 2 (2007).
14. David Paul, “Higher Education in Competitive Markets: Literature on Organizational Turnaround,” The Journal of General Education 54, no. 2 (2005).
15. Bent Flyvbjerg, “Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class Forecasting,” European Planning Studies 16 (January 2008); Daniel Kahneman, “New Challenges to the Rationality Assumption,” Journal of Institutional and Theoretical Economics 150, no. 1 (1994).
16. Alice Brown, “Case Study of a College That Closed: Saint Mary’s College,” New Directions for Higher Education (December 7, 2011); Brown and Ballard, 2012; Alan Hamlin and Curtiss Hungerford, “How Private Colleges Survive a Financial Crisis: Tools for Effective Planning and Management,” Planning for Higher Education (1989); Leslie and Fretwell, 1996; Terrence MacTaggart, “Boards as Game Changers,” Trusteeship (2011); David Paul, “Higher Education in Competitive Markets: Literature on Organizational Turnaround,” Journal of General Education (2005).
17. James Martin and James Samels, Turnaround: Leading Stressed Colleges and Universities To Succeed (Maryland: Johns Hopkins University Press, 2013); Michael Townsley, Small College Guide to Financial Health: Weathering Turbulent Times (NACUBO, 2009).
19. Ruth Cowan, “Prescription for Small-College Turnaround,” Change: The Magazine of Higher Learning, February 1993.
20. Terrence MacTaggart, Academic Turnarounds: Restoring Vitality to Challenged American Colleges and Universities (Lanham, MD: Rowman & Littlefield Publishing Group, 2007).
21. Emma Whitford and Matt Schifrin, “Forbes 2023 College Financial Grades: The Nation’s Strongest and Weakest Schools,” Forbes, April 26, 2023, https://www.forbes.com/sites/emmawhitford/2023/04/26/forbes-2023-college-financial-grades-the-strongest-and-weakest-colleges/?sh=2d94c3e11097.
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