Thursday, March 13, 2008

It won't happen to ME!

My wife and I were watching the news the other day about the former governor of New York and she asked me "Why do apparently SMART people take such obviously STUPID risks?"

Well, former Governor Spitzer took his chances for many personal reasons, but he was at least partly a victim of something called Optimism Bias. That's the fancy name for "Yeah I know it's a risk but IT WON'T HAPPEN TO ME." You've probably used that one yourself from time to time. It's what people say to themselves when they smoke. Or they don't wear their seat belts, or they send text messages while they're driving, or they have that rich fattening dessert when they're already overweight. "I won't get caught. I won't get lung cancer. I won't have an accident. I won't get heart disease." IT WON'T HAPPEN TO ME!

Optimism Bias is not just the tool of potential victims though. The flip side of "IT WON'T HAPPEN TO ME" is "IT WILL HAPPEN TO ME." That's the kind subconsciously applied by lottery players, or hedge fund managers, or bank or mortgage executives, or any of us, when we gamble with money hoping to make more. IT WILL HAPPEN TO ME, we tell ourselves, as we fork over five bucks on some scratch tickets…or lend money to people who are not likely to be able to pay it back, or when we buy things on margin…paying only 10% and the bank or broker pays the rest…only if the investment goes bad the bank or the broker calls the loan and we have to come up with the other 90%. Sounds a lot like the credit crisis, doesn't it? There's a reason why the so called credit bubble existed in the first place. The hot air of Optimism Bias helped inflate all that risky financial gambling to begin with.

We all use Optimism Bias, all the time. Optimism Bias is how we tell ourselves it's okay to have that extra beer before driving home from the bar, or to gamble on that chancy mortgage to buy our first home… or to cheat on relationships.

Is this rational? No. But then, perfect rationality is only a myth. We think that because we CAN think, that's how we OUGHT to decide. But our feelings and instincts and ancient needs are also big players in the choices we make and the chances we take. We all have hopes and desires, and Optimism Bias is one of the tools that helps us fulfill them. We ALL use it, not just the apparently smart people we hear about in the news when things don't turn out as optimistically as they had hoped.