Like most men, my husband thinks he is quite astute as an investor. He used to manage all his money by himself. After we got married, I persuaded him to turn our pathetic mutual funds over to a trained professional. But he's still not quite convinced. Every time our statement comes, he gripes, "I could probably have done at least as well as that."
Men are like that. They tend to have a high opinion of their own abilities. For example, 90 per cent of men believe they are above-average drivers. No one has polled them on how many of them think they are above-average lovers, but the results would no doubt be similar. Smart wives make sure they enthusiastically reinforce men's opinions of themselves, whether they are delusional or not.
But I am not here to make fun of overconfidence. I am here to praise it. Overconfidence is critical to success in life, especially business success. This is among the many important findings of behavioural psychologist Daniel Kahneman, who has been called the most important psychologist alive today.
In 2002, Mr. Kahneman won the Nobel Prize in economics – even though he isn't an economist – for showing how people really make decisions. The old theory was that people made decisions by thinking things through, evaluating all the available information and coming to rational conclusions. He discovered that it doesn't work that way. He found that we tend to make snap decisions, and rationalize them after the fact. These decisions are shaped by powerful cognitive biases that distort our thinking. In his essential new book, Thinking, Fast and Slow, he writes "We are prone to overestimate how much we understand the world and to underestimate the role of chance in the events."
One of the most important biases of all is the bias toward optimism. Human beings are generally optimistic. And optimistic individuals – you know who you are, because you're usually in charge – underestimate the odds they face, while vastly overestimating their chances of success. Without irrational optimism, Christopher Columbus would never have left Spain.
Optimism is the engine of capitalism. It is the signal trait of entrepreneurs. One survey found that 81 per cent of entrepreneurs thought their chances of success were 7 out of 10 or better. A third of them said their chance of failing was zero. In reality, only about 35 per cent of small businesses will survive for five years. Another study (using data from Canada's Inventor's Assistance Program) showed what happens when inventors are told their ideas are hopeless and have no chance of commercial success. Nearly half of them keep on going until they've doubled their losses.
Optimists tend to think their fate is entirely in their own hands. They believe that skill and hard work will invariably lead to success. This is another delusion (Mr. Kahneman calls it the illusion of control), but it's a useful one. It means they are persistent in the face of obstacles and resilient in the face of defeat. They can also talk people into helping them. These factors make success more likely. But in reality, their success usually depends far more heavily on outside factors – including luck – than on their own efforts. (See Christopher Columbus, above.)
The same is true in big corporations. The optimistic style is essential for making it to the top. (This explains why so many of us cautious types flunked out of management.) You're not going to get ahead if you're the guy in the meeting who points out that next year's revenue targets are hopelessly unrealistic.
Delusions of optimism often guide major business decisions, such as mergers and acquisitions. Top executives consistently overestimate the benefits and underestimate the risks. They are highly confident they'll be better managers than the turkeys who are running the place they're acquiring. And they completely discount the fact that their competitors are probably as smart as they are. For these reasons, most mergers and acquisitions are a bust. Of course, when they do work out, the people at the top will congratulate themselves on their skills and vision. And when they don't, they blame unforeseen adversities such as the economy. As Mr. Kahneman concludes, the quality of management doesn't matter all that much. "CEOs do influence performance, but the effects are much smaller than a reading of the business press suggests," he writes.
In fact, we all suffer from delusions of optimism. That's why we think our kitchen renovations will come in on budget, even though we know that other people's renovations hardly ever do. Yet rose-coloured glasses vastly improve our quality of life. Without them, people wouldn't start so many restaurants that have no hope of making a profit. Rose-coloured glasses are also essential for happy families. Spouses who overlook one another's flaws are invariably more contented than those who focus on them. Parents who think their kids are special are likely to be happier too.
Despite all the pitfalls of optimism, it's obvious that optimists are happier and have more fun. They're nicer to hang around with too. So I've been working hard to cultivate my sunny side. When people ask me how things are going, I always say "Fantastic!" You'd be amazed how well this works. My husband is fantastic too. If you met him, you'd agree. It's not delusional to say that he's superior in every way. It's just the truth.