What is Optimism Bias?

John Spacey, updated on March 01, 2016

Optimism Bias is a tendency for judgment to be clouded by excitement for the future. It typically results in underestimates of cost and risk and overestimates of returns associated with a particular strategy or action. In many cases, early phases of a project or initiative begin with optimism and decline towards pessimism as problems materialize.

Optimism is also a personality trait that is considered an admirable quality associated with youth, resilience and willingness to take risk. Although optimism bias results in inaccurate predictions, in some cases it causes an organization to take risks that end up paying off even if they were more expensive than anticipated.

Japan's bullet train system, known as Shinkansen, began in 1958 with overly optimistic estimates that resulted in actual costs nearly doubling planned budget. Nevertheless, the system became remarkably successful and a source of competitive advantage for Japan's economy. It was also an early symbol of Japanese technical abilities that is still a source of national pride. It is widely acknowledged that the system would have never been built if initial cost estimates had been realistic. Not all optimism bias works out so well. It is a common source of expensive and tragic failures.

Overview: Optimism Bias
Type	Cognitive Bias
Definition	The tendency for excitement for the future to result in underestimates of costs and risk and overestimates of returns.
Related Concepts	Positive Risk