Tag Archives: Neil Weinstein

Unrealistic Optimism Drives Profitability

Overconfident decision-making in financial markets led to myriad negative consequences in the past decade, when companies underestimated business risks. 

Gilles Hilary

Gilles Hilary

In contrast to overconfidence, unrealistically optimistic judgments can result in increased profitability and market value, according to INSEAD’s Gilles Hilary and Benjamin Segal with Charles Hsu of Hong Kong University of Science & Technology.

Benjamin Segal

Benjamin Segal

Hilary, Hsu, and Segal demonstrated that over-optimism differs from overconfidence, and may result in larger growth projections.

Charles Hsu

Charles Hsu

The team drew on earlier work by University of Illinois’s Dirk Hackbarth that showed both overconfident, and overoptimistic managers chose higher debt levels and issued more new debt.
Hackbarth did not differentiate over-confident and over-optimistic investment behaviors, and reported that both tendencies reduce manager-shareholder conflict, which can increase firm value.

Dirk Hackbarth

Dirk Hackbarth

Static over-optimism” refers to an unrealistically positive view of the impact of one’s own actions on future outcomes.
In contrast, “dynamic overconfidence” refers to overvaluation of one’s skills and the accuracy of private information.
In addition, “dynamic overconfidence”  is associated with  underestimates of random events after several positive outcomes, according to Hackbarth.

Together, static over-optimism and dynamic overconfidence lead to “dynamic over-optimism” after successes.

Neil Weinstein

Neil Weinstein

The pervasiveness of this “rose-tinted glasses” view leading to over-optimistic assessments was demonstrated by Neil Weinstein of University of Arizona.
He investigated people’s beliefs about future positive and negative health events, discussed in a previous blog post.
Weinstein reported that people tend to believe negative events are less likely to happen to them than to others, whereas they expect they are more likely than other people to experience positive events.

Hilary’s team built on Hackbarth’s concepts by comparing North American companies’ quarterly earnings forecasts with analysts’ predictions and actual performance.
Then, they calculated the number of company-issued press releases containing optimistic language.

Optimistic performance forecasts were correlated with better-than-expected performance, suggesting that successes led to additional effort and positive expectations.

Hilary noted the potentiating effect of past successful performance, though it may lead to “burnout” after about four quarters due to the challenge of continually exceeding performance expectations.

The team noted that this cycle of over-optimism and burnout might be mitigated by instituting policies to moderate overestimates or underestimates future performance by rewarding executives who provide accurate forecasts.

Sheryl Winston Smith

Sheryl Winston Smith

Similarly, Temple’s Sheryl Winston Smith noted that optimistic entrepreneurs chose higher levels of debt financing relative to equity, facilitating patent-based and product-based innovation among nearly 5,000 US firms tracked by the Kauffman Firm Survey (KFS).

Young-Hoon Kim

Young-Hoon Kim

In contrast to these financial studies, Yonsei University’s Young-Hoon Kim, Nanyang Technical University’s Chi-yue Chiu and Zhimin Zou of University of Illinois reported mixed results for self-enhancing (overconfident) and self-effacing (pessimistic) biases on performance

Chiu Chi-Yue

Chiu Chi-Yue

Kim’s team posited that either over-optimistic or pessimistic biases lead to “self-handicapping” behavior, in which people perform under disadvantageous conditions that provide an explanation for any poor performance outcomes.

Although over-optimism may drive innovation and financial results, longer-term consequences may include performance “burnout,” reduced motivation, and lower performance.

-*How to you manage the impact of optimism bias and pessimism bias on judgments and performance?

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Is Optimistic View of the Future Associated with Disabilities, Shorter Life Expectancy?

Frieder Lang

Frieder Lang

Frieder Lang of the University of Erlangen-Nuremberg and German Institute for Economic Research and his colleagues challenged the robust, replicated finding that optimism is associated with positive health outcomes.

David Weiss

David Weiss

Lang with University of Zurich’s David Weiss and Denis Gerstorf of Humboldt-University of Berlin and German Institute for Economic Research examined data from 1993 to 2003  German Socio-Economic Panel household surveys.

Denis Gerstorf

Denis Gerstorf

The team collaborated with Gert Wagner of German Institute for Economic Research and Max Planck Institute for Human Development evaluated approximately ratings from 40,000 people 18 to 96 years old, concerning their current and predicted life satisfaction in five years.

Gert Wagner

Gert Wagner

Their disruptive finding is that participants who expected highest life satisfaction in five years were more likely to experience disability and death within the following decade.

Five years after the first interviews:

  • 43 percent of participants were more satisfied with their lives than predicted,
  • 25 percent predicted accurately
  • 32 percent overestimated their life satisfaction with an optimistic bias.

Lang, Weiss, Gerstorf, and Wagner calculated that overestimating future life satisfaction was related to a 9.5 percent increase in reporting disabilities and a 10 percent increased incidence of death.

The youngest participants had the most optimistic outlook, whereas middle-aged adults made the most accurate predictions, but became more pessimistic over time.

Lauren Alloy

Lauren Alloy

Older adults’ predictions of future life satisfaction may be more accurate, albeit less optimistic, consistent with Shelley Taylor, Ellen Langer, Lauren Alloy, Lyn Abramson and others demonstration of an “optimism bias” and “depressive realism.”

Lyn Abramson

Lyn Abramson

In contrast to findings that higher income is associated with better health outcomes, Lang’s team found that stable, good health and income were associated with expecting a greater decline compared with those in poor health or with low incomes.
In contrast to other findings, higher income was related to a greater risk of disability.

Shelley Taylor

Shelley Taylor

Lang and team concluded that the outcomes of optimistic, accurate or pessimistic forecasts may depend on age, available resources, and motivation to adopt health-improving behaviors.
They acknowledged that unrealistic optimism about the future may help people feel better when they are facing inevitable negative outcomes, such as terminal disease.

Neil Weinstein

Neil Weinstein

Similarly, Neil Weinstein of Rutgers found that people may underestimate susceptibility to harm from a variety of hazards.
Close to 300 volunteers across age, gender, educational levels and occupational groups, demonstrated an optimism bias that they were less at risk than peers.

Weinstein hypothesized that optimism bias may be introduced when people extrapolate from their past experience to estimate their future vulnerability.
Therefore, volunteers future expectations may be biased  because they tended not to expect problems they had not already experienced.

He demonstrated that these personal risk judgments were not correlated with volunteers’ actual objective risk factors, suggesting that volunteers did not modify their optimistic biases based on laboratory findings, physical examination, and reported health habits.
Positive illusions persist even in the face of contradictory evidence.

Eric Kim

Eric Kim

These findings that optimistic bias may not be associated with positive health outcomes contrasts with findings from including University of Michigan’s Eric S Kim, Nansook Park, and Christopher Peterson, who found that “Dispositional Optimism” protects older adults from stroke.

George Patton

George Patton

Similarly, George Patton and colleagues at Royal Children’s Hospital in Parkville, Victoria, Australia reported that optimism has a somewhat protective effect on adolescent health risks in a prospective study.

Eric Giltay

Eric Giltay

Yet another counterpoint to Lang and team’s work was offered by Eric Giltay and colleagues at Leiden University Medical Center Johanna Geleijnse, Frans Zitman, Brian Buijsse, and Daan Kromhout, who demonstrated that optimists typically report healthier habits, like less smoking and drinking alcohol, more physical activity and consumption of fruit, vegetables and whole-grain bread.

-*What do you make of these conflicting findings about optimism’s role in health outcomes?

-*How have you seen optimism relate to health outcomes: Does it seem to drive healthy behaviors and outcomes or poorer health?

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