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How to Guard Against Optimism Bias

Of all the behavioural biases that people are prone to, one of the most prevalent is optimism bias. How do we guard against it?

We typically assume that things are going to turn out better than they do, and we overestimate the control that we as individuals have over events.

It is widespread and one of the things that you really need to guard yourself against as an investor.

Both your own optimism but also other people being optimistic with your money, it is also a thing that can really trip you up and lose you a lot of money.

Even people who go into casinos where it is not very much dependent on skills have this optimism that they’re going to beat the odds of the casino, and that’s why they enter.

Of course, this is not true.

It’s just human nature. The hardest thing to learn is not to be optimistic, it is difficult.

Overcoming optimism bias isn’t easy.

According to Bent Flyvbjerg, there are two important things we can do to minimise its negative impact.

The first thing is to realise that you do have optimism bias. We are all biased.

“The first thing to realise is “I’m biased” and then take it from there and of course if you are biased you need to be “De-biased” so you need to de-bias your decisions and that’s possible”.

“Just telling people about the empirical dates regarding the decisions that they are making will make them less bias. It will not eliminate the bias, but it will eliminate thirty to fifty of the bias”.

The most effective way to tackle optimism bias is to keep the number of subjective decisions that we make as investors to an absolute minimum.

Optimism bias must have an opportunity to kick in and that is only when you make objective decisions.

That is when it kicks in, so the more you can eliminate those and go on autopilot so to speak, the better off you will be in making investment decisions.

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