Kahneman and optimism

The practice of a measured and prudent optimism, closer to humility than to egomania, more typical of empathy than self-affirmation, may well be a useful tool to help navigate the uncertainty, disruption and complexity that surround it. characterize global capitalism in recent times

DWithin the analysis and study of what I call “material economics,” megaproject researchers—more specifically, megaproject management scholars—have been applying the ideas of Israeli-American psychologist and Nobel Prize winner in Economics, Daniel Kahneman, on biases. human cognitions and their influence on decision making.

Research over many years shows that 90% of megaprojects built fail their objectives or do not perform as well as they should, and this is due in part to a sequence of poor human decisions in design, planning and construction.

That so many poor megaprojects are built is due in part to the so-called “optimism bias,” which leads to exaggerating the benefits and downplaying the risks of a plan so that it can be more easily approved. But it’s not just this deliberate “strategic misrepresentation,” but also an inherent cognitive bias that, Kahneman says, makes us see the things we do better than they really are.

In his acclaimed book Thinking, Fast and Slow (Which I highly recommend reading) Kahneman argues that the human brain works very well most of the time and our judgments are sound. However, he is prone to a number of fallacies and systematic errors that lead to erroneous opinions and adverse decision-making. We assume certain things that favor us automatically, without having thought about them carefully.

The narrative fallacy (a term actually coined by Nassim Taleb) is a pertinent example. Narrative fallacies arise from the inevitable ongoing attempt by human beings to make sense of the world and from the fact that the explanatory stories that people find compelling are simple; they are concrete rather than abstract things and focus on a few eye-catching events.

Stories are easily complicated by the “halo effect” when told by a person of accepted status in the community. If we add the affective heuristic (in which people let likes and dislikes determine our beliefs about the world) we will understand how political preference determines the arguments that we find convincing. Add confirmation bias (the tendency to seek or believe only information that supports our point of view) and we begin to understand why we face such challenging political times.

For Kahneman, the optimistic bias “may well be the most significant of the cognitive biases” because it can be both a blessing and a risk. And he advises being happy – and cautious at the same time – if you have an optimistic temperament. On other occasions, Kahneman has called the optimistic bias “the engine of capitalism.”

Optimistic people play a disproportionate role in shaping our lives. Your decisions make a difference; they are the inventors, the entrepreneurs, the political leaders, not the common people. They got to where they are by seeking challenges and taking risks. They’re talented and they’ve been lucky (almost certainly luckier than they think).

However, optimism can lead to delusional tendencies, particularly for entrepreneurs. The chances of a small business surviving for five years in the United States are about 35%. But the people who open such businesses don’t think the statistics apply to them.

A survey showed that American entrepreneurs tend to believe that they are always in a promising line of business: their average estimate of the chances of success for “any business like yours” was 60%, nearly double the actual value. The bias was most apparent when people rated their own company’s odds. 81% of entrepreneurs estimated their personal chance of success at 70% and 33% said their chance of failure was zero.

Kahneman tells a short story about a visit he and his wife made years ago to Vancouver Island. They found an attractive but deserted motel on a little-traveled road in the middle of the woods. The owners were a lovely young couple who had used their life savings to buy the motel, which had been built a dozen years earlier.

Kahneman relates that the owners of the motel told them – without irony or timidity – that they had been able to buy it cheap “because six or seven previous owners had not been able to get away with it.” They did not feel the need to explain why they expected to succeed where six or seven others had failed. A common thread of boldness and optimism unites business people, from motel owners to superstar CEOs.

The optimistic bias contributes to seeing things only from our own perspective, something we usually do. Kahneman reveals his conversations with innovative startup founders and participants: To what extent will the outcome of his effort depend on what he does at his company? The response has never been less than 80%.

Even when they are not sure of success, these bold people think that their destiny is almost entirely in their own hands. Surely they are wrong: the result of a startup depends as much on the achievements of its competitors and changes in the market as on its own efforts.

Entrepreneurs naturally focus on what they know best: their plans and actions, the most immediate threats, and opportunities such as the availability of financing. They know less about their competitors, and therefore it is natural for them to imagine a future in which those competitors play a smaller role.

The consequence of neglecting competition is more competitors in the market than the market can support. The result is disappointing for the typical market participant, but the effect on the economy as a whole could well be positive. In fact, economists Giovanni Dosi and Dan Lovallo call entrepreneurial firms that fail but point new markets to more qualified competitors “optimistic martyrs,” good for the economy but bad for their investors.

Courage is the willingness to take the risk once you know the odds. Optimistic overconfidence means that you are taking a risk because you don’t know the odds of success. Taken together, “the emotional, cognitive, and social factors underpinning exaggerated optimism are a heady concoction,” Kahneman tells us.

“The blessings of optimism are offered only to people who have only a slight bias and who can ‘accentuate the positive’ without losing track of reality,” says Kahneman. Rational optimism seems to be what the entrepreneur should strive for, demonstrating the correct balance of optimism and confidence, without falling into the “delusion” of not accepting the possibility of his company failing.

The practice of a measured and prudent optimism, closer to humility than to egomania, more typical of empathy than self-affirmation, may well be a useful tool to help navigate the uncertainty, disruption and complexity that characterize global capitalism in recent times.

In a way, everything said appeals to some common sense and perhaps the reader has the impression that he already knew these things and has not learned anything he did not already know. Think again: his optimistic bias may be playing tricks on you. Author of the book Megaprojects in the World Economy. Complexity, Disruption and Sustainable Development (forthcoming from Columbia University Press, New York).

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Kahneman and optimism