There aren’t many better examples of optimism bias in action than the football World Cup.
It gets me every time. Without fail, every four years, no matter how bad they are, I make a plausible case in my head for England bringing the trophy home. Sure enough, every time I’m as surprised and heartbroken as anyone when they don’t.
Growing up, England were so bad they didn’t even qualify, and I actually bought a Scotland kit ahead of the finals in Argentina in 1978. The manager, Ally McLeod, told us they were going to win it, and who was I to argue? Alas, defeat to Peru and a draw with Iran left that dream in tatters too.
I’ve been reading and thinking a great deal about optimism bias recently while working on a video series for RockWealth called Your Own Worst Enemy. It’s a six-part series on behavioural finance which will be followed by a half-hour documentary early in 2019.
The original plan was to focus on a different behavioural bias in each part, but the more I looked into it the more I realised that optimism, and particularly overconfidence, are such important factors in the failure of most investors to achieve anything like market returns that they warranted two parts.
It’s a fascinating subject, not least because optimism bias, like most of the other main behavioural biases, are largely positive characteristics that serve us well in many aspects of life. There are evolutionary reasons why we developed them.
Optimism bias also comes in many different guises. For example, there’s the illusion of control (the sense that we have control over something when we don’t); the better-than-average effect (assuming that we’re better at something than we actually are; and unrealistic optimism (the tendency to underestimate the chances of a negative outcome).
We posted Part 1 of Your Own Worst Enemy, a couple of months ago. Here it is, if you haven’t seen it:
In Part 2, we look in more detail at why beating the market is far harder than it might appear:
Look out for Part 3 in this series in early September, in which we’re going to explore loss aversion.
In the meantime, enjoy the closing stages of Russia 2018. Best of luck if yours is one of the teams that’s still in it, but don’t get carried away. As Gary Lineker said while downplaying England’s chances the other day, it’s the hope that kills you.
ROBIN POWELL is the founder and editor of The Evidence-Based Investor. A freelance journalist, he runs Regis Media, a specialist content marketing consultancy for financial advice firms, and is Head of Client Education for the UK-based financial planning firm RockWealth LLP.