What is... | January 13, 2017

What is optimism bias?

The belief the future will be better than the past (and the present) is common. But looking at our lives with rose-tinted glasses can be risky.

Hope is usually a good thing. It is the reason we run marathons, start a business, climb mountains and believe we have what it takes to become CEO. It helps us reach our goals and persevere in the face of setbacks.

But research suggests we’re more optimistic than realistic. When it comes to predicting what will happen to us tomorrow, next week, or 50 years from now, we overestimate the chance of positive events, and underestimate the likelihood of negative events. The difference between a person's expectation and the outcome that follows is described as the optimism bias.

We’re wired to be optimists
Cognitive neuroscientist Tali Sharot says optimism is wired into our brains and is prevalent across gender, race, nationality and age. In her book, The Optimism Bias: A Tour of the Irrationally Positive Brain, she writes that people hugely underestimate their chances of getting a divorce, losing their job or being diagnosed with cancer. They often expect their children to be extraordinarily gifted and sometimes overestimate their likely lifespan by 20 years or more.

Highly optimistic people play a significant role in shaping our lives. They are often the inventors, the entrepreneurs, the political and military leaders and they may have got to where they are by seeking challenges and taking risks. This might be a case of overconfidence in their abilities, and the admiration of others reinforces this belief.

Success recipe?
In a world full of uncertainty and competition, accentuating the positive without losing track of reality is helpful. At work, optimism appears to be the harbinger of success. Duke economists Manju Puri and David Robinson reported in their study that moderately optimistic people work harder, expect to retire later, and invest more in individual shares, which may account for their higher pay. 

Nobel Prize–winning behavioural economist Daniel Kahneman writes in his book, Thinking Fast and Slow, that highly optimistic individuals play a significant role in shaping our lives too. They are often the inventors, the entrepreneurs, the political and military leaders and they may well have got to where they are by seeking challenges and taking risks. This might be a case of overconfidence in their abilities, and our natural tendency to admire other people’s public success can reinforce this belief. 

I’m going to be a millionaire
However, unrealistic expectations about the future can result in impulsive behaviour such as borrowing more than we can repay or consuming now – instead of rationing ourselves over time. A survey of UK teenagers found that on average they expected to earn a salary of £31,000 by the age of 25. In reality, most 22 to 29-year-olds were at the time earning £17,817. 

But adults don’t do much better either. When it comes to retirement planning, people often underestimate the age at which they can retire, even when they are relatively close to retirement. In another UK survey, respondents believe that to get £25,000 per year retirement income for 20 years they’ll only need to have saved a pension pot of £124,000. The amount required, at that time,was closer to £315,000. 

An overly rosy outlook can undermine a person’s ability to protect themselves, their assets and people who depend on them. As a result, they may be under-insured and fail to put enough money aside as “rainy day” savings. Or they may continue to bet on a bad investment, reducing their financial resilience. This can be particularly problematic, as research shows: negative changes in circumstances are the most commonly cited reason for falling into unmanageable debt. 

The pre-mortem: a partial remedy
Psychologist Gary Klein has come up with a neat trick to manage this perception of control. He recommends doing a pre-mortem for all the major decisions we make. A pre-mortem is the hypothetical opposite of a post-mortem.

The idea is simple. Before starting a risky venture (such as launching a business or investing in shares), imagine the decision was made months or years ago and resulted in a dramatic, gigantic failure. Now, work backwards from there and think of all the possible reasons for this failure.

This method forces people to act against their confirmation bias, the natural tendency to look only for evidence that supports an original belief. 

Although the pre-mortem may not be a magic potion, it’ll certainly lessen the pain of the post-mortem which might be needed when reality doesn’t match up to optimistic expectations.


eZonomics team
.(JavaScript must be enabled to view this email address)