Optimism Bias

Every time you see a commercial  for casinos, they show seemingly happy people each stating how much they won at the casino. I have all reasons to believe these are true endorsements. Of course what they are not telling us is what  their net earnings are after all the money they  spent since they started gambling. It is not surprising that the casinos do not want to highlight this, after all they want to only talk about the winnings. But you might find this surprising to hear that in real life, outside of the commercials, neither do the protagonists in those commercials talk about the total amount they lost to gain these winnings. It is human behavior to ignore or downplay the negatives and focus on the positives. This is the same reason that led them to gambling in the first place.

Prof. Dan Ariely writes in his blog about this irrational optimism

The basic idea is that when people judge their chances of experiencing a good outcome–getting a great job or having a successful marriage, healthy kids, or financial security–they estimate their odds to be higher than average. But when they contemplate the probability that something bad will befall them (a heart attack, a divorce, a parking ticket), they estimate their odds to be lower than those of other people.

This is the same irrational optimism that leads many entrepreneurs to start their venture, despite the market conditions, lack of strategy, lack of competitive advantage and their own lack of wherewithal to execute. Just like the gambler commercials that focus on the winnings, most entrepreneurs tend to focus on the success stories. The two common traits in both are –  first, they ignore the opportunity cost of the capital and time they are investing, be it gambling or the new venture and second they strengthen their own resolve to jump in by overestimating gains and underestimating risks.

The result is the big gambling losses and the increasingly high number of start-up failures. All from Predictably Irrational Exuberance.

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