Optimism Bias 5 reasons to be aware of it in your business and your life

#1The architect of Behavioral Economics, Daniel Kahneman, describes the Optimism Bias this way: “In terms of

its consequences for decisions, the Optimism Bias may well be the most significant of the cognitive biases.”

• Whether in business or personal lives, the Optimism Bias causes humans to grossly underestimate

the amount of time and difficulty associated with completing particularly large or complex tasks.

Some of this is related to our general difficulty with calculating probabilities, etc., but the larger

issue at play is the Optimism Bias, which prevents us from realistically assessing all the aspects of

the project or the situation we are in.

#2The Optimism Bias, which is inherent in all of us to one degree or another, gives us the illusion that the future

is bright and great things are right around the corner. Known average statistics just simply don’t apply to us.

• Ask any newly married couple what the divorce rate is and they’ll probably give you the right

answer (around 50%). However, ask the probability of THEIR getting divorced, and their answer will

most likely be around zero (even if asked individually). Obviously every individual case is different,

but traditional economic theory assumes that people consider the base rate or prior probability. In

this case, the base rate would be the fact that half of married couples get divorced, which most

newlyweds typically do not consider when evaluating the chances of their relationship working out.

#3The Optimism Bias does not just simply apply to future events. Most people tend to believe they are above

average.

• Unfortunately, as statistics go, less than half of the population can’t be above average at their job,

their driving ability, their intelligence level, etc. Most people are overly optimistic about their own

abilities and therefore don’t consider the actual reality of the situation when making decisions.

• According to a study conducted in 1977, professors were asked to rate their performances

compared to their peers. Even though these were professors, most of whom probably had some

knowledge of probability distributions, almost all of them thought they were better than average

(94% to be exact). Even the seemingly most intelligent and rational members of society are subject

to this bias.

• This element of the Optimism Bias appears to functionally protect our self-esteem, which is highly

valued in Western culture.

#4The Optimism Bias is critical to surviving daily life. In actuality, being optimistic is an evolutionary

characteristic that has helped us survive this long.

• If we regularly view ourselves or see our lives exactly the way they actually are, or view the future

with as much accuracy as possible, we will have little to look forward to. At the very least, we

would always play it safe and only take reasonable chances it ultimately takes to be successful.

• Being optimistic also supports learning. This is because optimistic thinking does not consider that

any surprises may occur—particularly mistakes. So, when there is a surprise or a mistake occurs, it is

much easier to recognize since it was not expected.

#5The primary problem with the Optimism Bias for our selves and our businesses is that it can lead to self-

destructive behavior.

• While there are other reasons, even ones that are perfectly rational, the Optimism Bias is a major

contributor to sustained risky behavior.

• Consider the fact that many people still smoke. Even after decades of research about the harmful

effects and the addictive properties of cigarettes, there are still many people out there who smoke on

a daily basis. It is the Optimism Bias that prevents these smokers from realistically assessing their

likelihood of early death as a result of this behavior. Or people at high risk for diabetes from getting

tested. Or people who know better to fail to sign up for insurance or properly fund their 401Ks, etc.

Want to talk about how the Optimism Bias applies to your business?

CONTACT:Bryan DeCecco | Director, Business Development 412-471-8484 ext. 512bdececco@campos.com

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