Optimism Risk?

Time Magazine has a solid article about the optimistic nature of the human mind.  Instead of summarizing its points, I suggest you read it before continuing this post.  While some may complain that I should provide a short version of the pieces I refer to, I think it’s better to take the 10 minutes it requires to absorb the author’s intended interpretation.  Besides, many of my previous posts already summarize it.  How’s that for justification.

Our optimism has obvious implications for how we think about risk and the last paragraph really sums up the situation nicely.  We’re all inclined to overestimate our chances of success and we downplay the negative consequences.  This approach has many benefits to the survival of our ancestors (uh, and for our decedents!) but it can cost us individually because we suffer the consequences when things don’t go our way.  Risk Management is about much more than preventing loss — it’s about keeping us in the game to take advantage of future opportunities.  The author’s last paragraph is key — knowledge about the downside of optimism is a very good way of preventing those losses.

As a very optimistic person, and a risk taker, I’m fascinated by the simultaneity of the benefits of believing we will prevail with the need for limiting danger that directly contradicts that optimism.  Since our brains appear to be hardwired to discredit (and sometimes not even notice) the downside, it’s that much more important for us to learn about how we naturally tend to view the world.  I for one do not plan on trying to be less optimistic.  Rather, I want to better understand the chances of different losses and what might lead to them.  That, it seems to me, gives me a solid chance of having the best of both worlds.

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