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April 30, 2008

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Optimism is a mental disorder.

Pessimist by policy, optimist by temperament - it is possible to be both. How? By never taking an unnecessary chance and
minimizing risks you can't avoid. This permits you to play out the game happily, untroubled by the certainty of the outcome.
-- Robert A Heinlein, The Notebooks of Lazarus Long

Another thing to think about is that there would be much less crime if criminals were less optimistic.

Atleast for surgical procedures, and dinner parties, being optimistic about the out-come may imporove the out-come. Is stratigic optimism a bias?

I think one factor in this is that the most successful people often attribute their success to optimism. They achieved their goals in many cases only after repeated failures and setbacks, and it was their fundamental optimism that allowed them to get past that. People see these examples and conclude that an optimistic bias is a prerequisite for success.

The problem is that this is a selection effect and does not prove that being optimistic increases either your chances of success or your expected total happiness (whichever is your goal). It's possible that both the greatest successes and the most spectacular failures can be attributed to optimism. Now knzn suggests that optimism bias increases risk taking, and this leads directly to greater expected returns per standard portfolio theory. He also suggests that even if the result is not directly beneficial to optimists, there are positive externalities from their risk taking (I didn't fully understand this point).

Further, I think there are studies showing that optimism, even if intentionally adopted and not an inherent attribute, does increase happiness and satisfaction with life, which may be an independent reason to be optimistic.

He also suggests that even if the result is not directly beneficial to optimists, there are positive externalities from their risk taking (I didn't fully understand this point).

It's simple enough: the populace in general derives from value from one popular musical artist than it loses in the failure of ten thousand people who tried to become popular and didn't manage it.

From an individual point of view, the expected value of trying to be an artist may be negative, but (so it is argued) society benefits from having all those people take the risk.

Who are you going to hire to manage your money: the guy who says he can give you 15% returns, or the guy who says he can give you 10% returns?

The hardest lie to detect is one that the liar believes.

Caledonian, that's not clear about the rare successes. Those 10000 failures do exert costs on society, both in terms of direct costs like unemployment benefits and medical care, and also in terms of lost benefits from other, less ambitious things that they might have been more successful at.

What knzn said was that the market fails to offer entrepreneurs full diversification of risks, hence there is less than optimal risk-taking, and this bias might compensate for that. This is the part I didn't understand - it sounds like he's suggesting that it should be possible to buy failure insurance, but you can't, hence this discourages people from trying things that might fail.

I wonder if people's estimates of their own optimism and that of others might be overly high due to optimism bias.

Caledonian, that's not clear about the rare successes. Those 10000 failures do exert costs on society, both in terms of direct costs like unemployment benefits and medical care, and also in terms of lost benefits from other, less ambitious things that they might have been more successful at.

1) I'm not saying the argument is correct, I'm merely stating what it is.
2) Failing at becoming a famous artist doesn't mean you can't then succeed at something more likely. There's an opportunity cost, of course, but it's not as though they're total losses.

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