2. A number of social psychologists have worked on concepts of heuristics (mental shortcuts to make decisions) and how they introduce bias into decision making. Much of this work is based on the 1960s and 1970s research of Amos Tversky and Daniel Kahneman on human judgement. This won Kahneman the Noble Prize for Economics in 2002, and helped launch the academic discipline of behavioural economics.
3. One avenue of heuristic research focuses on optimism bias: peoples' tendency to predict better outcomes than actually happen. For example, Weinstein used psychological experimentation to find that college students and undergraduates rated their own chances as significantly above average of experiencing positive events and below average for experiencing negative events.110 Others applied similar experiments to experts, managers, chief executives, traders and market analysts, finding that these groups are also susceptible to optimism bias. Weinstein argued that people are unrealistically optimistic because they focus on factors that improve their own chances of achieving desirable outcomes and fail to realise that others may have just as many factors in their favour.
4. Many of these experiments showed that people were more likely to be optimistic for events where:
- the issue is within their control, more than random events;
- a positive outcome if perceived as common and negative outcomes are perceived as rare; and
- they have little personal experience.
5. Psychologists argue that this optimism bias is caused by peoples' tendency to overstate the likelihood of outcomes they desire (motivational reasoning) and overestimate their own abilities because they are comparing themselves to others (focalism) and it is easier to access information about yourself and your own project or task (egocentricism).
6. This general concept, it is argued, leads to a planning fallacy: a systematic bias in planning and decision-making whereby the costs, completion times, and risks of planned actions are underestimated, whilst the benefits are overestimated.111
7. Thomas Gilovich, Dale Griffin and Daniel Kahneman recently brought much of this work together in Heuristics and Biases: The Psychology of Intuitive Judgement (Cambridge University Press, 2002).
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110 Weinstein, N. D. (1980). Unrealistic optimism about future life events. Journal of Personality and Social Psychology, 39, 806-820.
111 For example, Delusions of Success: How optimism undermines executives' decisions. Dan Lovallo and Daniel Kahneman, Harvard Business Review (July 2003)