Optimism Bias
The tendency to expect better outcomes for oneself than the base rate justifies.
How it is identified
Test: personal probability estimates for favourable outcomes exceed the observed frequency in the relevant population
Unit
qualitative
In depth
Optimism bias is close to universal and is not entirely harmful — it underlies entrepreneurship and the willingness to invest at all. In markets it produces forecasts that are systematically too high, which is visible in analyst estimates that are revised downward through most years, and in the belief that one will outperform an average that most participants cannot beat. It combines with the planning fallacy to produce project timelines and return expectations that are consistently too favourable. Anchoring expectations on the base rate rather than on one's own assessment is the correction, and it feels unreasonably pessimistic while being merely accurate.
Worked example
Surveys consistently find that most active investors expect to beat the market. Arithmetically at most half the money can, and after costs considerably less than half does.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Optimism Bias” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.