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Why Optimism Bias May Work Against You

Personal Insurance, Life Insurance, Protect Your Family

Key Takeaways
• Life is made up of good things and bad things.
• Relish the good and take action to plan for the bad.
• Live for today but save for the future.

Optimistic? Good!

Well, maybe not so good.

There's a psychological bias that makes folks think that bad things won't happen to them. It's called optimism bias.

Basically, it's the idea that, generally, people are really bad at judging odds and assessing risk when it comes to themselves.

Think about it... when you wake up in the morning, do you think that today is the day you'll be hit by a car? Is this the week you get cancer? Of course not. That's not the way most of us are wired.

The truth about optimism bias

Optimism bias is a good thing because it helps people get out of bed in the morning and face the day, free from the paralyzing fear that a life-threatening event could happen at any moment.

But optimism bias can be a bad thing because it can cause people to think that bad things will never happen to them. And that can cause them to avoid doing things that are ultimately in their best interest, like saving for the future or purchasing disability or life insurance.

Truth is, life is made up of good things and bad things. We should relish the good and take action to plan for the bad, or the potentially bad, just in case.

What the experts say
Television viewers may recognize Dr. Dan Gilbert from a Prudential commercial. Dr. Gilbert is an American social psychologist and writer, and also an Edgar Pierce Professor of Psychology at Harvard University. In the commercial, Dr. Gilbert runs a survey with a group of strangers. He asks them to rate and share moments of great significance in their past as well as what they anticipate their future will be like. The result: their past tended to have fairly equal ratio of negative to positive experiences. In contrast, their predictions for their future were a lot more optimistic than for their past, showing that it is human nature to predict mostly good things for the future [Watch Dr. Glibert’s talk on the psychology of your future self].

Another lead thinker in the area of optimism bias is Dr. Tali Sharot. She is an Associate Professor of cognitive neuroscience in the Department of Experimental Psychology at the University College in London. Dr. Sharot's research suggests that the human brain is wired to be mostly optimistic instead of realistic. She says that an outlook like that can be both risky and useful in the long run [See Dr. Sharot’s talk on the optimism bias].

It also gives us unrealistic appraisals of our own abilities. We tend to rate our talents as much better than the next guy's. She says, "Now this is statistically impossible. We can't all be better than everyone else."

We simply tend to reject the idea that we could be average. Most of us see ourselves in the upper ranks when it comes to brains, ability and potential.

What you can do next Invest in insurance.

Buckle your seat belt. Don't text and drive. Understand that bad things can happen to you, and it may be worth your while to prepare, just in case.

John Renz is a writer focusing on topics related to finance and insurance. He’s also a husband, father, brother, uncle, and son, but doesn’t really make much money at those jobs.

Group Insurance coverages are issued by The Prudential Insurance Company of America, a Prudential Financial company, Newark, NJ.