Things can only get better (Optimism Bias)

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Are you always late for appointment? Do you know someone who goes over budget and over time for every project? They might be suffering from the optimism bias. Here’s the transcript for episode 7 season 3 of our podcast How to Choose:

‘Things can only get better (Optimism Bias)’. You can listen to it here on our website or on your favourite podcast player.

Tessa: Hi, there. This is How to Choose, the show that helps you make better decisions and improves your judgment. Thanks for joining us. I’m Tessa.

Ken: And I’m Ken. In this, our third season of How To Choose, we’re exploring the topic of thinking problems or biases that impede our decision making.

Tessa: Today, we’re talking about optimism bias. Ken, I would say that you and I are optimists. Would you agree?

Ken: Yes, I’m definitely a ‘glass is at least 60% full’ kind of person.

Tessa: Yeah, look, I’d probably even go as high as 70%. Many people are probably surprised that this is even a bias. I mean, I certainly was a bit surprised when I did the research on this one, but today we’ll discuss some of the risks of too much optimism. Ken, do you have much turnover of local businesses in your neighbourhood?

Ken: Well, look, I’ve never really noticed it before, but now that you mention it there has been a bit of turnover in the last few years, and there’s probably at least one other business that’s looking quite shaky at the moment.

Tessa: I think, for some reason, I’m hyper vigilant on this wherever I’ve lived. It just makes me so sad whenever somewhere closes down and in my local shops, there’s one shop front that’s turned over at least four times in the last eight years.

Ken: Wow, that’s a lot. If I didn’t know better, Tess, I might say that shop was cursed.

Tessa: Yeah, cursed. Maybe there’s a ghost kind of scaring away potential customers, but I don’t think it is down to bad luck. I would actually put it down to optimism bias, because I’m sure that many businesses would have similar stories. So someone starts off super excited by their new business. They have a great idea, for example, a modern restaurant, something innovative and different to what’s already in the neighbourhood. And then, despite the fact that the past three businesses in this location have failed, the entrepreneur feels that they have what it takes to make this one succeed. Maybe they’ve got their finger on the pulse of what young people like and they know there’s a gap in the market, so they pour their time and finances into this business. A friend might suggest they’re putting a bit too much capital into the fit out, but they’re determined to carry out their vision. Then they have an exciting opening. The restaurant gets a lot of customers and good feedback. They have some normal teething problems. But as the months go on, the high rent and the constant overheads aren’t able to be met when the buzz of being the newest restaurant in the area wears off. Each month, revenue fails to meet the expenses, but they don’t have enough capital to continue without making a profit. So, sadly, despite passion, confidence, talent, and a lot of optimism, like an estimated 20% of new small businesses in Australia, the restaurant fails. Or maybe they do manage to last into their first few years. But then they join the 60% of businesses that don’t survive beyond five years of launching.

Ken: Yeah, those are some really sobering statistics, aren’t they? I was recently made aware of a great little cafe that’s up for sale in a busy area of the city, and my first thought was, wow, if I only had the cash, it would be so cool to buy that cafe. But despite the superficial appeal of this cafe’s vibe, I suspect it’s probably hit the same issues you’ve described. And it’s about to become, sadly, another statistic.

Tessa: Yeah, I mean, I just find these stories so tragic because, you know, that behind every ‘For Sale’ sign someone has put so much time, energy and money into opening any kind of business, and it must just be one of the hardest decisions to make to close up shops.

Ken: And so you’re thinking then that too much optimism is part of the problem for all of those failed businesses?

Tessa: In part, yes. So let’s explore some of this theory. Optimism bias refers to our tendency to overestimate the likelihood of experiencing positive events and underestimate the likelihood of experiencing negative events. It was first labelled unrealistic optimism in a 1980s study by Neil Weinstein. And unfounded optimism can actually cause you to choose behaviours that are not in your best interest, because you underestimate the chance that bad things will happen to you. So maybe you don’t go to the doctor for a regular checkup because you’re healthy, so why go? Or you occasionally don’t wear a seatbelt. You’ve never been in a crash. Or maybe you don’t put sunscreen on quite so regularly. A little bit of a tan isn’t going to hurt you all because you mistakenly believe that bad things aren’t going to happen to you.

Ken: Yeah, that’s right. And we spoke about this in our last episode when we explored base rate neglect. There’s a strong tendency to assume that somehow the averages don’t apply to us, that we’re exceptional. But I know that you’re not suggesting we become pessimistic cynics either, are you, Tess?

Tessa: No, I’m not arguing against being optimistic, Ken. You and I are both self-professed optimists, and in many ways, optimism can actually be very beneficial. Research has shown that optimism can actually be a self-fulfilling prophecy. By believing that we will be successful, people are in fact, more likely to be successful. This kind of optimism enhances well-being by creating a sense of anticipation about the future.

Ken: And I’m sure that optimism also motivates us to pursue our goals, doesn’t it? I mean, if we didn’t believe that we were going to be successful, or at least that we had a pretty good chance, why would we even bother trying? And surely optimists are more likely to do things like exercise and have a healthy diet if you thought it was all for nothing and you probably wouldn’t bother.

Tessa: Yeah, exactly. Optimism is really very important. And research shows that around 80% of us do exhibit an optimistic bias and it’s responsible for lots of good in our lives. However, as we’ve seen in our entrepreneur example, there are also large costs to the optimism bias. In our personal and professional lives, we overestimate our chances of success. We assume that projects will be completed in shorter amounts of time than they actually are. We assume our relationships will last longer than is realistic. We assume that we will make more money than others. So the optimism bias can actually stop us from taking preventative measures like buying insurance or even using contraceptives, because you think, it won’t happen to me.

Ken: When you say it out loud, it does sound silly, doesn’t it? But yeah, that makes sense. It is necessary then, to have some optimism. In fact, for many endeavours, this podcast is a great example. Optimism encourages us to persevere, to take risks and to try new things, even in the face of challenges.

Tessa: Yeah, exactly. It is so important. But like many things we talk about in this podcast, it’s about that self-awareness and self-reflection. We need to be aware of how our optimism can also blind us to negative outcomes and result in poor decision making. In fact, cognitive neuroscientist and optimism expert Tali Sharot argues that optimism bias was one of the core causes of the financial downfall. In 2008, the financial sector had unrealistic expectations of growth and success. Banks engaged in high risk decision making and contributed to the growing economic bubble and its ultimate crash.

Ken: Yeah, that’s right. The optimism bias also impacts our global response to big things like climate change. We feel, again, like bad things might happen to others, but not to us. With climate change, this can allow us to feel like the consequences of environmental disaster won’t affect us personally. So we maintain our lifestyle and we feel like we’re doing our part when we put the recycling out and ignore the vast quantity of single use plastics that are filling up those recycling bins and sadly, our landfill too. Here in Australia, one study found that optimism bias resulted in less environmental concern by climate sceptics. It resulted in less guilt, less perceived responsibility and lower behavioural intentions.

Tessa: Yeah, it probably demotivates people to take action, doesn’t it, when you’re a bit too optimistic. In those situations, we’re most susceptible to the optimism bias. When it comes to unlikely events. We underestimate the likelihood of being affected by things like floods, cyclones or fires. And we also exhibit the bias when we think the events are under our direct control. We think that we have the skills to avoid bad things happening. And as you know, Ken, we are all above average here on How to Choose.

Ken: Yes, normal but never average. I must get some T shirts made up. Tess with the slogan ‘base rate neglecters, we’re normal but never average.’

Tessa: That’s a very catchy slogan, Ken. I like that one. So, to test out this bias, I thought I’d ask some people what their likelihood of getting in a car crash was compared to the average person and then compared to the opposite gender.

Ken: Interesting. Let’s have a listen.

Tessa: What is the percentage likelihood of you getting in a car crash in the next year?

Vox Pop: 10%.

Tessa: What is the percentage likelihood for the average person?

Vox Pop: 10%.

Tessa: What is the percentage likelihood for the opposite gender?

Vox Pop: 8%.

Tessa: What is the percentage likelihood of you getting in a car crash in the next year?

Vox Pop: I don’t  know. 10%.

Tessa: What is the percentage likelihood for the average person?

Vox Pop : 10%.

Tessa: What is the percentage likelihood of the opposite gender?

Vox Pop: Probably 15%.

Tessa: What is the percentage likelihood of you getting in a car crash in the next year?

Vox Pop:: 7%.

Tessa: What is the percentage likelihood for the average person?

Vox Pop: 7%.

Tessa: What is the percentage likelihood for the opposite gender?

Vox Pop: 80%. Yeah, the same.

Tessa: What is the percentage likelihood of you getting in a car crash in the next year?

Vox Pop: 2%.

Tessa What is the percentage likelihood for the average person?

Vox Pop: 2%.

Tessa: What is the percentage likelihood for the opposite gender?

Vox Pop: Can I pull out now? I want to stop answering. 2%.

Tessa: So I didn’t elicit as much of an optimism bias as I’d hoped, but I think people were maybe not being completely honest as they knew this was being recorded.

Ken: Yeah. There’s sometimes two answers to these questions, isn’t there? The answer that I give you and the answer that I’m not willing to admit to.

Tessa: Yeah. And this is a challenge for all researchers, not just armchair experts like us. Ken but according to research from Australia, at least one in ten Australians will be involved in a car accident in the next year. And men are much more likely to be in a crash than women. The 20 to 24 age group accounts for just 4% of the Australian population, but men in this age bracket make up 10% of annual road fatalities, whereas women of the same age make up 2%. So very few of the men I interviewed recognize this perhaps exhibiting an optimism bias.

Ken: Yeah. And as a dad of two young male teenage drivers, that’s a very sobering statistic. And I do try to remind my boys of this, I think, too. In season one, we spoke about the development of the adolescent brain, didn’t we? And the fact that our frontal lobe, which is the part of our brain that’s involved in planning and impulse control, isn’t fully developed until our mid-20s. So we’re adults under the law. We’re allowed to drive, we’re able to buy alcohol, but unfortunately, our brains aren’t fully developed.

Tessa: Yeah, exactly. And I’m sure teenagers exhibit optimism bias at higher rates than adults because of this as well. Too much optimism can affect us in many ways, a bit like your studying example in the Overestimating Our Abilities episode in season one. Ken and please go back and listen to that one, because it’s a great story.

Ken: Yeah. Please don’t!

Tessa: Studies have found that those who expect success at exams may get overconfident and fail to prepare for tests as well as their more anxious peers.

Ken: Yes, sadly, I can relate, as that story demonstrates. But life has a way of bringing us back to Earth, doesn’t it? And after many years of tertiary study, and I’m studying still now, Tessa, I’ve become much more aware of my capabilities and limitations. We’ve all heard the saying, fake it till you make it. I somehow suspect that the diehard optimist might not even realize that they’re faking it. They’re just so confident in their ability, and that lack of awareness can be a real problem. Optimism bias affects our ability to accurately estimate the likelihood of something bad happening. And this is really interesting. We have a tendency to update our beliefs with positive information and data, much more than with negative information and data. So, for instance, if I asked you, what is the likelihood of you getting robbed? And you said, well, say 10%, and I said to you, well, the statistic is actually 20%, most people being optimistic would only make a fairly minor change to their estimate. But if instead you had guessed that the likelihood was 20%, and then I said, well, look, the statistics show Tess that it’s only 10% likelihood, then many people actually then would revise their answer down to around 5% likelihood that they would get robbed. This does not make sense. This is not logical. But this is the optimism bias at work. We just don’t think bad things are likely to happen to us.

Tessa: So how can we mitigate this effect without becoming a pessimist? Our old friend Daniel Kahneman suggests two approaches taking an outside view and doing a pre mortem approach.

Ken: Oh. Daniel Kahneman. That’s it. Tess, I think we need to start ringing a bell. Every time we mention Daniel Kahneman or Amos Tversky. I’m going to institute a bell-ringing next episode.

Tessa: Look, they deserve to be highlighted, so I support this decision. Kahneman advocates using base rates to provide an outside view, which, if you missed it, was episode six of this season. Base rates provide quantitative data to anchor our judgments, so they get us out of our thinking fast or emotional subconscious reflexive decision making heads. Base rates can be the probability of an event occurring, the average time something takes, or whatever figure fits the situation, as long as the base rate is from existing data. So this way, when you’re planning, say, a kitchen renovation, you don’t trust your contractor when they tell you it will take three months. You need some data to make an accurate estimate. What is the average length of time for a kitchen renovation in your city? Then think about other concrete things that might be relevant. Have there been any supply chain challenges? Have you booked in subcontractors? Or you were just assuming the tile will be ready when you need them? And I actually had this problem recently when I did a kitchen renovation because I assumed that the contractor would take care of all of that, but not realizing that I had to go out and book in the Tyler and the Painter and that that all blew out my timeline. Yeah.

Ken: And that’s actually a good opportunity for us to maybe just highlight the importance of identifying our assumptions. We might have to unpack this in a future episode. There’s a technique called the key assumptions check that analysts use, and it’s a process of saying, well, if this belief is true, then what else must be true first? Or, if this project is going to succeed, what other things must be true for that to work? So, yeah, I think that’s some really good practical advice tests, and you can apply that to any project. Now, there’s a strategy, also called the pre mortem approach, and that can help you predict areas of potential failure. When you start a project, you or your team need to imagine a year into the future where your project has failed. So that’s hard for an optimist. We don’t like to imagine such things, but then just dwell on that for a little while and write down what might have gone wrong. And why did it go wrong to get you to that point of failure. By considering negative outcomes, we can resist the short sightedness of optimism bias.

Tessa: Yeah. I can see how this would be really helpful in many scenarios, including my kitchen personal example. And maybe for the entrepreneur, one thing a pre mortem could show is the risk of not having enough capital to write out those early months and years that can be less profitable. You could then plan on how to avoid some of those pitfalls.

Ken: Yeah. And for the home renovator, you might consider slowdowns from staff shortages, the lack of supply of key items, or competition. I mean, what if your small job becomes the lower priority for your builder and then you’re left with a half finished kitchen? Do you have a contract? We just don’t think of any of these things happening to us, and so we don’t plan for them.

Tessa: I actually had a former colleague, this is several years ago now, who in the budgeting for his mortgage built in the cost of fuel going up to $2 a litre and interest rates being 2% higher. He had done his own kind of pre mortem and saw these as two biggest risks to being able to meet his mortgage repayments. At the time, it seemed odd being so careful, but he didn’t want to put himself in a position where he couldn’t service a mortgage due to these kind of changes.

Ken: Yeah, that’s some very impressive planning.

Tessa: Yeah, he definitely didn’t suffer from the optimism bias. So, Ken, what’s your key takeaway from this episode?

Ken: Look, as an optimist, in the past, I have reacted against other people’s negativity or scepticism because it drags down my enthusiasm for an idea. And sometimes I even avoid people who I know are going to ask me difficult questions. What I need to do instead is to factor in some time for that scepticism. I don’t know if you’ve come across the book Six Thinking Hats by Edward DeBono, but without going into all the detail, DeBono teaches that good thinking needs to include time for both optimism and scepticism. And the pre mortem, as we’ve mentioned, is one of those tools that can help us to do some of that cautious thinking that can help balance against optimism. What about you, Tess?

Tessa: I can also recommend the Six Thinking Hats, but it’s been a while since I’ve read it, so I have to refresh myself on that one. Ken. But for me, it’s not about suppressing my optimism, it’s about not being naively optimistic. So the fact that we don’t update our beliefs with negative information in comparison to positive information is something that’s really stuck with me. As an analyst, I know that in order to make good judgments, I need to be constantly updating my beliefs. So I’m going to be careful to ensure that I am absorbing negative inputs to the same degree as positive ones in the future. What is your key? Takeaway listener. And remember, teach a friend. It will help your learning stick.

Ken: And if you’ve enjoyed this episode, make sure to subscribe to how to choose and visit us at

Tessa: And be sure to tune in next week when we’ll be learning all about a bias that pushes us in a different direction to the optimism bias and that is loss aversion.

Ken: Yes, I am looking forward to that one. And don’t forget to tell your friends about us. We’d love to meet them too.

Tessa: Bye for now.

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