It was releasing an IPO IPO An initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. He comes across XYZ Limited the company was popular, but its finances were down. Let us assume that Hugh is an investor looking for the right IPO. Now, let us understand the effect of optimism bias in investments:
Later, the country faced back-to-back COVID-19 waves, for which it was totally unprepared. The government was under the illusion that the economy Economy An economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society. In October 2021, the US government considered the pandemic a short-lived one. This bravado was not backed by any facts whatsoever, most ended up in a hospital. For instance, during the Covid pandemic, many people believed that they wouldn’t get infected and stopped following instructions. Imagine you’ve just finished a long, tiring week of classes.Optimism bias makes people careless-they stop taking precautions. It’s a Saturday afternoon and you’ve decided to reward yourself with a lazy day. You make some popcorn, grab your laptop and pull up Netflix. You’re watching Grey’s Anatomy, and you’re in the middle of season 5. You are shocked to find out that Izzie, a young doctor on the show, has been diagnosed with a brain tumor. You watch episode after episode until you reach the heart wrenching season finale when a different favorite character dies in a tragic accident. As you exhaust your box of tissues, you wonder how producer Shonda Rhimes concocts these episodes. You think about your own life and conclude that, at the end of the day, none of the tragedies in this medical soap opera could ever happen to you.
You’ll never get sick like the fictitious characters of whom you’ve grown fond.
You’ll never get in that car accident and wind up as a trauma patient. If you’ve ever had a conversation like this with yourself- one in which you underestimate the likelihood that negative events will impact your life – you have demonstrated the optimism bias. The optimism bias is the cognitive bias that leads us to overestimate the likelihood that a positive event will happen in our lives and underestimate the likelihood that a negative event will occur in our futures (Sharot, 2011).
Optimism, by definition, is the expectation that good things will happen. Pessimism refers to the expectation that bad things will happen. One of the first studies to experimentally explore the optimism bias took place at Rutgers University in 1980. In this study, 200 college undergraduate students were given a list of 42 events to read and imagine. Some of the events were positive, including items like living past 80, graduating in the top third of the class, and not getting sick all winter. Other events were negative, such as dropping out of college, developing cancer, and being injured in a car accident. The participants were then asked to rate how likely they were to experience each one of the events compared to how likely their classmates were to experience the events. Students rated that their chances of experiencing positive events were significantly above average, while they predicted that their chances of experiencing a negative event was significantly below average (Weinstein, 1980). People tend to underestimate the likelihood of future negative events occurring. College students are not the only people to show the optimism bias is seen across people of all races, age groups, and genders (Sharot, 2011).
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