Nobel laureate Daniel Kahneman, along with the late Amos Tversky, is probably one of the most important thinkers of our time. His work on decision making and the biases that pervade our thinking patterns, help to shed light on the inconsistencies of human behavior with the rational model of decision that is the basis of modern economical theory.
We are not as rational as we think we are. We usually make the same mistakes over and over without even realizing that we are mistaken or the origin of those errors. Behavioral economics, that is getting a lot of attention lately, owes much of its core assumptions to the work of Kahneman and Tversky.
One of the most interesting and important biases uncovered by their work is the Optimistic bias that makes people assume a more probable brighter future for themselves and their endevors, over-estimating the probability of positive outcomes and under-estimating the likelihood of negative outcomes. In a recent article for Bloomberg, Kahneman calls it “the most significant bias”:
Because optimistic bias is both a blessing and a risk, you should be both happy and wary if you are temperamentally optimistic.
Optimism is normal, but some fortunate people are more optimistic than the rest of us. If you are genetically endowed with an optimistic bias, you hardly need to be told that you are a lucky person — you already feel fortunate.
Optimistic people play a disproportionate role in shaping our lives. Their decisions make a difference; they are inventors, entrepreneurs, political and military leaders — not average people. They got to where they are by seeking challenges and taking risks. They are talented and they have been lucky, almost certainly luckier than they acknowledge.
A survey of founders of small businesses concluded that entrepreneurs are more sanguine than midlevel managers about life in general. Their experiences of success have confirmed their faith in their judgment and in their ability to control events. Their self-confidence is reinforced by the admiration of others. This reasoning leads to a hypothesis: The people who have the greatest influence on the lives of others are likely to be optimistic and overconfident, and to take more risks than they realize.
This excerpt is part of 4 articles that Kahneman wrote for Bloomberg that are a highly recommended reading. We can read the four part article on “Bias, Blindness and How We Truly Think” over the following links: Part 1, Part 2, Part 3 & Part 4.
For more of Kahneman thoughts and experiments, you shoul read is recently published book Thinking Fast & Slow that already has been considered one of the most important books of the year.