Our brain is wired to believe that we are less likely to suffer from misfortune and more likely to attain success than reality would suggest. The phenomenon is also often referred to as “the illusion of invulnerability,” or “personal fable“.
The believe that “It won’t happen to me“: I’ll never be victim of a crime…. smokers would believe that they are less likely to contract lung cancer or disease than other smokers…… first-time bungee jumpers believing that they are less at risk of an injury than other jumpers…traders who think they are less exposed to potential losses in the market…..
People might not wear their seatbelt, miss adding money to their emergency savings account, or fail to put on sunscreen because they mistakenly believe that they are less likely to get in an accident, need extra cash, or get sun burnt.
We tend to be optimistic about our financial investments (underestimating the risk of failures), we tend to be optimistic abut the costs of the house we have started to build (underestimating the real costs we are going to bear), we tend to be optimistic about our marriage (underestimating the incidence of divorces).
This fallacy is in part correlated with the above-average-bias: we believe that we will live longer than the average, that our children will be smarter than the average, and that we will be more successful in life than the average. But by definition, we can’t all be above average.
Why are we so geared toward optimism? Why our brains have been wired by evolution to see the glass half-full?
Cognitive neuroscientist Tali Sharot, author of “The Optimism Bias: A Tour of the Irrationally Positive Brain”, suggests that, while this optimism bias can at times lead to negative outcomes like foolishly engaging in risky behaviors or making poor choices , it can also have its benefits. This optimism enhances well-being by creating a sense of anticipation about the future. If we expect good things to happen, we are more likely to be happy. This optimism, can act as a self-fulfilling prophecy: by believing that we will be successful, people are in fact more likely to be successful.
Infrequent events are more likely to be influenced by the optimism bias. People tend to think that they are less likely to be affected by things like hurricanes and floods simply because these are generally not everyday events. This is linked with the representativeness heuristics.
The famous recent Market Crash of 2007-2009 was the product of optimism and euphoria on financial growth, especially on real estate sector. And this typical ins the history of the economy.
In 1929, few days before the inception of the Great Depression and the biggest Market Crash of the last two centuries, the most famous professor in Economy at that time, Irving Fisher, pronounced his (in)famous words:
“Markets seemed to have reached a permanently high plateau”.
After a few days the world witnessed the economical Collapse.
Here the sinus wave of emotions that accompanies our choices. Optimism is the ad libitum starting point.