Last week was all about overcorrections – this week I wanted to look at another classic human bias which affects many of us – if not all of us in some way, shape or form and that is overoptimism.
It is worth highlighting something before we start. Governmental projects that run over £100m, in a survey some years back, were found to go over budget by around 66% and take 75% longer than first predicted.
Anyone who has been observing crossrail (for example) will see that little has changed. And that’s before we consider HS2……
Now there’s an obvious rider to that that needs addressing up front. There’s a “game” played at the governmental level. Ultimately you have a lot of people who are not investing their own money. At the very best the people at the top can hope to have their monikers on the successful project (e.g. Boris bikes….rather than Boris bridge for example). It may give them some currency/political capital for future runs for higher offices. But that’s about all.
It isn’t a commercial decision and there is a strong case for lowballing and making it sound easier than it is because everyone knows – once the project is underway, 99% of the time it is going to be seen to conclusion regardless of budget and time.
Even so, overoptimism seems to shine through. And there are similarities…..ever gone over 20% over budget on a refurb? I sure have. What do you do? You don’t stop…..you might value engineer some parts to get some money back/save some cost but the driver is getting the job done and then refinanced/tenanted/sold depending on your preference.
The more optimistic you are as a person the more your natural tendency will be to be overoptimistic! Be aware of this – it will be a continual battle. It isn’t something you unlearn…..natural biases are very strong indeed. The most you can really hope for is to be aware of them and look out for them and ask yourself searching questions.
Is it all bad though? Definitely not! The pessimist will rarely start the project, and may never buy the first property. If I’d had a pound for the number of people saying “don’t buy in a limited company because they will just change the rules like they have with personally held properties”. This misses so many points by so far it isn’t even worth unpacking.
Sometimes the alternative isn’t to play at all and one of my favourite movie quotes is from the great 1998 poker film “Rounders” (Matt Damon – if you’ve never seen it and you like poker I’d highly recommend it) – “you can’t lose what you don’t put in the middle. But you can’t win anything either.” This doesn’t mean take on every project of course but it does mean that you need to be objective, not correct things by becoming the quintessential naysayer.
Overoptimism is one reason why I love data so much. Look at the reality of what has happened rather than your imperfect memory or clouded perception. Rose-tinted spectacles is the manifestation of another bias – and also putting too much weight on the last week, month, year, last recession etc. Is another bias – recency bias – at work.
Ask questions. Be disagreeable (even if your natural trait is to be agreeable). Trust the numbers and the data not your own biases, or others.
If you want to learn some more about this portfolio of biases that we all carry around – I’d highly recommend thinking, fast and slow by Daniel Kahneman. It may not be that page turning “autobiography” of your favourite sports star etc. But it might well do more for you than many other books you could be reading if you do have some summer downtime……
Understand bias
Correct
Don’t overcorrect
Question
Take action
Repeat!
The realistic are the ones that hang around in this game for the long run. The overoptimistic are at high risk of going broke at any one time. That’s how seriously it can impact you as an investor!
Until next week – be optimistic, just not TOO optimistic…..
