Optimism Bias

My brother in law is a keen footballer, playing and coaching. He lives in the US and having a British soccer coach is a sought after commodity. As a long-term US resident he hasn’t lost his love of football but has come to appreciate the US sports such as baseball and American football and so was concerned to hear about the growing evidence of long-term brain damage in American footballers caused by repeated concussions during their playing careers. Given the way American football is played it made sense to him that this could be an issue and he accepted it (maybe he even wondered about whether this effected rugby players back in Blighty). 

When concussion started to be discussed as a possible issue in football/soccer caused by repeatedly heading the ball it was of obvious concern to him and he followed the coverage in the UK. If true it would be potentially a big issue for him personally and for getting on for hundreds of kids he has coached over the years. 

Speaking to him recently though it is no longer a concern for him. When we discussed it he confidently stated that concussions in football/soccer were likely caused by bad heading technique. That directing the ball when you head it rather than letting it hit you means that your head is moving with the ball and not against it. 

Now I don’t know the statistics or the science behind sporting concussion so I chose not to challenge him but I wondered whether he was right and what he had based that opinion on. 

Now my brother in law is a clever guy and if he is wrong he is making the mistake that so many of us make in life and I am not immune and so can’t criticise. 

His end state is a mixture of Optimism Basis and the Back-Fire effect. Once you understand both of these biases you may find yourself becoming a quieter more reflective thinker. 

Optimism Bias is simply the conviction that good things will happen to you or bad things won’t. It is why so many more than 50% of people polled regularly say that they are better than average at a wide range of things. We tend to latch onto evidence that supports our view and discard anything that challenges it. 

Another good example is the smoker that claims that it isn’t as dangerous as everyone says because they no a lady who smoked and lived to 90. Optimism bias is well explained here

The back-fire effect is what the Amygdala part of the brain is doing to respond to the threat of new information that contradicts the views that we have already formed. 

The back-fire effect has been beautifully illustrated here and is well worth your time looking through. 

So in the world of finance this bias and the resulting effect are very dangerous. We can easily persuade ourselves of our own amazing ability to beat the markets or our adviser/investment manager’s ability to outperform. This can lead us to lose money by taking risks we can’t cope with, paying to much for advice/investment management or being too trusting. 

The cure is to not trust ourselves fully, to always pause, question and to seek after data that contradicts as well as confirms our opinions. 

One of the most helpful things we do at Altor is show our clients regularly how their various funds and managers have performed compared with each other, inflation, their own target and the wider market. This independent information (and the fact that we do not suffer from the common bias of managing money ourselves) allows clients to see what is actually happening to their wealth and why we recommend any changes. 

We will be covering Optimism Bias’ big brother Pessimism Bias at a later date. 

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