Optimism bias

Risk management - cognitive bias.

Optimism bias is an unconscious cognitive bias.

It leads to overestimating the likelihood of success of our ideas and intentions.

Optimism bias is also known as overconfidence bias.

The risk of optimism bias is widespread across many areas of management, finance and treasury.

For this reason it is a very important risk to manage and compensate for.

Optimism bias adjustments must be applied

"Optimism bias [is] the proven tendency for appraisers to be optimistically biased about key project parameters, including capital costs and operating costs, project duration, and resulting benefits delivery.

Optimistic rather than realistic projections result in undeliverable targets and if permitted across the board create institutional failure as all proposals fall consistently far short of promised results.

For this reason, specific optimism bias adjustments must be applied at the start of the process as numbers are initially identified."

Project appraisal and evaluation in central government - the 'Green Book' - UK Government - 2022.

Uncertainty, optimism bias and risk

"In appraisal, uncertainty is often due to lack of evidence or understanding of the likely impact of new interventions. Research and previous evaluation evidence, pilot studies and evidence of what works can help to reduce this uncertainty.

Optimism bias is the demonstrated systematic tendency for appraisers to be over-optimistic about key project parameters...

Risks are specific uncertainties that arise from activities such as forecasting or implementation, the costs of which have been estimated. They are specific to an intervention and may be quantified and managed."

Project appraisal and evaluation in central government - the 'Green Book' - UK Government - 2022 - Section 13.1.

See also

• Affinity bias
• Bandwagon bias
• Behavioural economics
• Choice supporting bias
• Cognitive bias
• Confidence
• Confirmation bias
• Diversity
• Dunning-Kruger effect
• Emotional intelligence
• Impostor syndrome
• Objectivity
• Reactance bias
• Resilience
• Risk
• Risk management
• Self-investment bias
• Social bias
• Source bias
• Sunk cost fallacy
• Treasury

Other resource

• Project appraisal and evaluation in central government - the 'Green Book' - UK Government - 2022