How the human tendency to remain over-optimistic can affect decisions
10-Sep-2015 •Mohammed Ekramul Haque
What is it? This is our natural tendency to be over-optimistic and how that affects our decisions. Take a common example you may have heard a number of times. The ancient Greek orator Demosthenes famously said three centuries before Christ, "What a man wishes, that also will he believe."
What is the antidote to the overoptmism tendency? Here is Munger's prescription, "One standard antidote to foolish optimism is trained, habitual use of the simple probability math of Fermat and Pascal, taught in my youth to high school sophomores."
Often found in: Our views about things that affect us
In Life: It is not necessary for us to suffer or be in pain for the overoptimism tendency to come into action. As humans, we often display an excess of self-optimism even where there is no pain or threat of pain. As such, excessive self-optimism tendency becomes a normal human condition that can lead us to believing a number things that may not be correct. Munger gives the example of "happy people buying lottery tickets or believing that credit-furnishing, delivery-making grocery stores were going to displace a great many superefficient cash-and-carry supermarkets."
In corporations: Even companies can get carried away with the overoptimism bug. Tulsi Tanti of Suzlon went on a global shopping spree apparently overoptimistic about the wonders that wind power could do for him. Tata acquired Corus just before the financial crisis hit and was saddled with debt. Havells acquired Sylvania - a company much bigger than itself - and nearly went down under.
In investing: How many of us have been largely over-optimistic for quite some time now about acche din aayengey, even when there is no conclusive data till date of things turning around for core sectors? The overoptimism bug in investing can cause much harm if you continue to remain over-optimistic about a company, trend or market direction.
You just read about one of the misjudgements people generally make while investing. Read 25 ways to (Not) make mistakes to get an account of Charlie Munger's twenty-five typical misjudgements, along with our commentary on how they fit into Indian businesses and Indian investments.