23 November 2015

Is Overconfidence Bias All that Bad?

A while back Daniel Kahneman said in an interview that if he would have a Magic Wand he would eliminate overconfidence.

The article further elaborates on what Kahneman means: “Overconfidence: the kind of optimism that leads governments to believe that wars are quickly winnable and capital projects will come in on budget despite statistics predicting exactly the opposite.”

Probably the best known example of overconfidence is that of newlywed couples who, very close to the time of getting married, unanimously say that their chances of getting divorced are zero. This, despite the statistical fact that around 50% of marriages end in divorce. If I’m not mistaken, even people who get married for the second time exhibit a similar overconfidence bias.

Without challenging the great Kahneman, I wonder if there isn’t a good (evolutionary) reason for why we’re all affected by overconfidence.

It goes without saying that the prediction: the war will be over by Christmas was wrong for both World War I and World War II. Naturally overestimating one chances of success when starting a war is detrimental – one starts a war.

However, there are lots of benign cases of overconfidence bias that have some positive impact, at least at a higher societal level.

Coming back to marriages: if, at the time of the wedding, we wouldn’t be overconfident about our marriages’ chances of success, we might never do it… and this includes those whose marriages last.

Having children is another case of overconfidence and is strongly correlated to marriage. Whether married or not, future parents underestimate the hassles they will face.

Overconfidence among (wannabe) entrepreneurs is widely known. Every entrepreneur believes she or he will bring to the world the next major business, paradigm-shifting tech product etc.

The statistical reality, however, is a lot more down to Earth. Most new businesses fail and the chance of creating the next big business is in the same order of magnitude of winning the lottery.

However, trying to start a new business brings some benefits at both societal and individual level. In order for a new business to benefit its owners it doesn’t have to be the Next Big Thing. In order for it to benefit society, it can be even a small business that works reasonably well.

With the risk of using myself as an example, when I started my first business (after successfully setting-up a student non-profit), I was wondering: How can I fail? and I got more than one answer. My first business endeavor was an utter failure. But after a while, I tried again in a different area of business and after about a year I managed to find a business model that worked (at least for a couple of years).

Without starting that first, doomed to fail business, I would have never started the one that finally worked.   

There’s a Romanian saying that would translate to English as:

You entered the game, now play.

I believe overconfidence has the role of Getting us into the Game; of getting our behinds off the couch and doing something. Even if that initial something doesn’t work, we’re in the game and we have to play, so we are forced to figure out how to manage.

I believe many people get married due to love and, of course, overconfidence. Naturally things don’t go as in the ideal scenario, but this makes us figure out ways in which we can make things work.

Many people start a business that doesn’t go as they dreamed (overconfidence strikes again), but at least some will try to figure out what and how can work. Maybe some entrepreneurs start as (delusional) dreamers who believe that they will bring The Next Big Thing, but end up having a reasonable small business that provides them with an income and pays a few employees.

I believe overconfidence plays a huge role in getting us to begin doing things. Some will end up in failure, but others will get done and will be useful. 

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