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“The optimism bias (also known as unrealistic or comparative optimism) is a cognitive bias that causes a person to believe that they are less at risk of experiencing a negative event compared to others.

“There are four factors that cause a person to be optimistically biased: their desired end state, their cognitive mechanisms, the information they have about themselves versus others, and overall mood. The optimistic bias is seen in a number of situations. For example: people believing that they are less at risk of being a crime victim, smokers believing that they are less likely to contract lung cancer or disease than other smokers, first-time bungee jumpers believing that they are less at risk of an injury than other jumpers, or traders who think they are less exposed to losses in the markets.

“Although the optimism bias occurs for both positive events, such as believing oneself to be more financially successful than others, and negative events, such as being less likely to have a drinking problem, there is more research and evidence suggesting that the bias is stronger for negative events. Different consequences result from these two types of events: positive events often lead to feelings of well being and self-esteem, while negative events lead to consequences involving more risk, such as engaging in risky behaviors and not taking precautionary measures for safety.” ~ Wikipedia.

What we need to understand is that this optimism bias can also lead to denial and delusion. Even when the red flags are flying, the red warning lights are flashing, and the sirens are howling, these people will deny that anything is wrong and think they’re “being positive” or courageous, or some other claptrap. They will justify and deny in a childlike fashion.

Optimism Bias is closely related to the Sunk Cost Syndrome. “Sunk Costs” is money or time already invested into some business opportunity. Instead of accepting that we have lost money and that it is time to move on, people go into denial; the Sunk Cost Syndrome has people continuing to lose time and money to justify the sunk costs. Rational thinking dictates that we should ignore sunk costs when making a business decision. The goal of any business decision is to alter the course of the future. And because sunk costs cannot be changed, we should avoid taking those costs into account when deciding how to proceed.

Business requires objective evaluation on a regular basis, and numbers don’t lie. Keep track of the numbers: Your bank account is your Business Report Card. Look at the graphs, the trends. Either you can fix it or you need to cut bait. Get expert advice, if necessary, but you don’t have to lose your shirt.

Robin Elliott LeverageAdvantage.com

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