Optimism Bias

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It’s funny that sometimes the things that makes some of us most successful can also be our greatest undoing.

I just finished a fantastic book called, Entrepreneurial Negotiation. The authors Samuel (Mooly) Dinnar and Lawrence (Larry) Susskind interviewed a stack of entrepreneurs to determine how entrepreneurs negotiate and where they sometimes make mistakes.

In their research they found that there are 8 mistakes that entrepreneurs regularly make with regards to negotiation. Let me tell you, when I read these mistakes, I could relate to EVERY SINGLE ONE. One of the mistakes that I closely related to is being overly optimistic or overly confident. Confidence is a requirement for being an entrepreneur. If you’re not confident, you’ll probably fail. Likewise, confidence is also a requirement for a good negotiator. You need to believe you can get a good deal. But overconfidence is a very serious trap.

This is a trap I can easily fall into, so I decided to do more research, and what I found is that there are essentially four factors that drive the cognitive bias some of us have called optimism bias (also called unrealistic or comparative optimism):

  1. Desired End-State of Comparative Judgement
  2. Cognitive Mechanisms
  3. Information They Have about Themselves versus Others
  4. Overall Mood

1. Desired End State of Comparative Judgment
Basically this is just a fancy way of saying that we believe that we’re better off than others, and we think we’ll get a better result of have lower risks because we have an enhanced self image, we have an enhanced sense of self-presentation (how we look), we have an enhanced sense of perceived control.

What’s weird about desired state of comparative judgement is that these are important for confidence too. But with over-confidence it’s unfounded. There’s nothing to support that except your perception. With true confidence, this believe would be supported by ability, experience, hard work, etc.

2. Cognitive Mechanisms
There are three cognitive mechanisms that people with optimism bias have. A cognitive mechanism is just the way we think about something. The first mechanism people with optimism bias have is called a representativeness heuristic (a heuristic is essentially a mental shortcut to help make decisions faster). Basically what is says is that people who struggle with optimism bias make judgments about the probability of an event , under uncertainty, that is in their favor. For example, let’s say you were in a car accident with another driver. What happened? Well, if you’re affected by this, you might say the other driver was a bad driver.

The singular target focus talks about how how we think of “others” in a negotiation as a generalized group – “the counter party” which leads to biased estimates on how decisions might be made on their side. The third cognitive mechanism is about our perceived risk comparative to the other party. The further apart we view ourselves from them, the less associated risk we believe their may be. Arrogant, right!?! That’s what I though when I first did the research.

3. Information They Have About Themselves versus Others
We have a lot more information about ourselves than others.This leads us to sometimes make conclusions about our own risk, but makes it harder to assess the risks of others. Te larger the gap in understanding, the larger the gap in our understanding of the other person the larger the optimism bias becomes.

4. Overall Mood
Sad/anxious people have less optimism bias. Happy people tend to have more.

“Nice psychology lesson, Mark, but what does it all mean?!?”

Great question.

The optimism bias prevents us from taking the appropriate measures to mitigate risk that may be more prevalent than we believe because we’re POSITIVE that risk would never happen to us.

How do we fix it?

Check yourself. Don’t make a decision or recommend a course of action until you’ve asked yourself, “Am I being overly optimistic here.” Get someone else to check your recommendations or approach. Get someone to poke holes in your approach. Get them to try sink your battleship. Always ask the question, “What am I assuming?”

What are some ways you think you could catch yourself from making decisions that have been affected by your optimism bias? And if right now you’re thinking, “This doesn’t affect me. I’m not overly optimistic.”, it may be a good time to stop and reflect on what you just thought.