Thursday, January 20, 2011

Irrationality and Our Optimism

All of us will be quite unanimous about the statement that optimism is a great human faculty.  It is an inner force that drives us to venture into the unknown, pulls us from the depths of despair and sometimes gives us the raw energy to pull on when things are tough. Expressions of optimisms that conjure up the indomitable human spirit abound in our literature. Often in our lives we use quotes brimming with optimism to egg others on. We have seen that the perspective of optimism turns the table around. I have a personal favourite here- Thomas Edison at the age of 67 met with a disaster-the factory that he built over the years was completely gutted in a terrible fire on a chilly New Jersey night. Next morning, Mr Edison looked at the ruins of his factory and said this of his loss: “There's value in disaster. All our mistakes are burnt up.  Thank God, we can start anew.” This is an enviable perspective that gives birth to fresh enterprise.

But optimism sits squarely on the right side of realism on our mental continuum. For all the virtues of optimism, there is an unmistakable play of cognitive bias from which it is almost impossible for us to escape. Optimism often leads us towards beliefs and opinions which are not rational. For example almost all of us believe ourselves in the top 20 per cent of the population when it comes to driving, pleasing a partner, or managing business. Even drivers laid up after an accident caused by them, genuinely refuse to accept that they have poor driving skill. Almost all of us are irrationally optimistic about our health and lifespan- all of us like to think that we will live long. In business optimism not only generates unrealistic forecasts, but also leads managers to underestimate future challenges more subtly – for instance, by ignoring the risk of a clash with an incumbent competition while entering into a particular segment. Those who are in sales would know that over-optimism tends to produce over-commitment. Over-optimism may create organizational biases as well- for example when the management takes an optimistic business call, dissenting or doubting voice is equated with disloyalty.

Collective optimism can also lead to large-scale disasters. Over-optimism of a very large number of people about their repayment capacity on mortgages led to the housing bubble and recession in the United States. Irrationality and optimism are at the very heart of any economic bubble. Now a very relevant question is – what is the remedy of irrational optimism? Can we escape from it? A raft of research in psychology and behavioural economics indicate that as individuals we are very ill equipped to handle irrational optimism. Corporations are slightly better off. By putting the right set of processes and safeguards, they may be able reduce or discourage over-optimism. One of my intellectual heroes of our time, Nassim Taleb in this latest book “How to live in a world that we do not understand” underscores this very point of future uncertainty and irrational optimism thereby. He suggests ways to adjust to some humility about how much we understand the world we live in. Thinking small, taking two insurance policies and reminding ourselves morning and evening that we don’t know much about the future and having some discipline and quality control over the decisions we need to make may help cure the irrationality around optimism.

However, let’s not forget that optimism can be a very good thing, contributing towards success and happiness in life. However, in many important areas of our lives we tend to be irrationally optimistic. In times of uncertainty and rapid changes, we should be wary of irrational optimism, be it for ourselves or our organization.

1 comment:

  1. Hi Kabir,
    Good buddy, Bit of a philosopher in you