Optimism Bias: What It Is, How It Affects You

Optimism bias has been called “one of the greatest deceptions of which the human mind is capable” and “the engine of capitalism.” But how does it work, and is it good for you?

Conrad von Soest, “Brillenapostel” (source: Wikimedia Images)

Almost a hundred years ago, when Geoffrey Faber founded what would become Faber & Faber, the renowned London publishing house, he was so certain of his venture that he bet his mother’s, his own, and his friends’ fortunes on it, concluding, “everybody would benefit … with a substantial income” (emphasis in the original).*

A year later, the new publishing house was in its first of several near-bankruptcies, and Faber wrote in his diary:

“I find it hard to justify my buoyant self-confidence of last year … I ought, I think, to have foreseen trouble and gone more cautiously.”

That’s optimism bias and what it does to individuals and businesses. Geoffrey Faber is not the only entrepreneur to have been tripped up like this. It’s typical. What’s less typical is that Faber & Faber survived to tell the story. Most companies fail and are forgotten.

You would never get on a plane if you overheard the pilot say to the co-pilot, “I’m optimistic about the fuel-situation.”

In psychology, optimism bias is defined as a cognitive bias. Most people are subject to this bias and it is the tendency for individuals to be overly bullish about the outcomes of planned actions. Tali Sharot calls it “one of the greatest deceptions of which the human mind is capable.”

Where strategic misrepresentation is deliberate, optimism bias is non-deliberate, but the outcomes may be the same. In the grip of optimism, people — including experts — are unaware they are optimistic. They make decisions based on an ideal vision of the future rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefits and underestimate costs. They involuntarily spin scenarios of success and overlook the potential for mistakes and miscalculations. As a result, plans are unlikely to deliver as expected in terms of benefits and costs.