When Optimism Can Be Bad?
This is why being overoptimistic can lead to poor purchasing decisions
I am sure this story feels so familiar.
John and Jane had been dating for nearly a year now and they were madly in love with each other. They thought they could conquer anything together as long as they were together. As a young guy, John knew getting married wasn't such a great idea. He was told by his family that he and Jane should date more to get to know each other better.
Despite hearing about the high divorce rate and unhappy marriages, they were sure that their relationship would be different; that theirs was strong enough to withstand anything.
However, once married life began, the couple encountered numerous difficulties. Despite their best efforts to make it work, they found themselves increasingly unhappy and distant from each other.
They got divorced later.
People do the same thing when they buy stuff and then regret it
After making a purchase, why do we often feel like we made the wrong decision? Despite our optimism and confidence, why don't our expectations match reality when it comes to enjoying and owning the product?
In this article, I'm going to discuss how being overly optimistic can sabotage buying decisions. We'll examine the consequences of such an approach and then I will offer some tips on how to approach shopping with a more realistic outlook.
Regret over a purchase
There's at least one regret for almost 70% of new homeowners, a new study says. One in five respondents regretted underestimating the total cost of buying a home. Nearly 40% said they wish they had looked around more before buying. There were also regrets about the location, buying too quickly, and unexpected maintenance costs.
What about online shopping? People seem to get buyers remorse a lot. According to Slick Deals, 74% of Americans have experienced buyer's remorse after shopping online. An amazing 73% of respondents have at least 15 items they don't like that were bought online.
We're not done yet because the survey asks what happens after delivery. More than half of respondents (45%) store unwanted items somewhere they won't see them again. Most of them (40%) regift them to someone they know, while the rest (39%) exchange them or return them.
Here's a great hack-you don't have to buy almost anything if you know that info. Ask your friends and family if they have anything they recently bought they don't need and they'll give it to you. It could save you a lot of money 🙂
If that doesn't shock you, then the next thing will. I decided to see what's going on in the car market. In the end, it is my domain and I am very interested in people's regrets after they purchase a vehicle
Nearly 40% of car buyers regret their purchase. About a third of consumers regret their ownership decisions. The biggest regrets are choosing a different make or model, buying an unaffordably expensive car, and not shopping around.
What's most surprising is that high earners are struggling to pay for cars. About 17% of people struggle to pay their car payment. Contrary to expectations, wealthier respondents were more likely to share this worry. Almost 28 percent of respondents who earn $100,000 or more struggle to pay their car bill. Just 12% of those making less than $35,000 worried about their car payments.
In England, consumers face similar problems. Every year, over 10 billion pounds sterling are lost because buyers make the wrong choice. A survey found that 82% of adults have regretted a purchase in the past, and 67% have regretted one in the last year.
The two main reasons are: expectations weren't met, and the product didn't get used. About 57% of respondents said the product wasn't what they expected. The second reason 42% regretted their purchase was they didn't use them as much as they thought they would.
What's happening?
An optimism bias is one of the most common biases in human nature, which can explain why people regret their purchases. I'm always amazed at how quickly people make car buying decisions without considering all the options. It's true that they're customers who made the research and know what they want, but it's a small number.
Whenever we buy a car, a house, or invest big money, we get overwhelmed by all the information and variables available. In the house study, nearly forty percent wish they had spent more time looking for a house or weighing their options. As a result, shortcuts are used to make the process easier and faster. These shortcuts are called biases. One of the most common biases I've observed myself and research supports is optimism.
Let's talk about optimism bias and how it affects our buying decisions
What is optimism bias?
When it comes to predicting what will happen to us tomorrow, next week, or fifty years from now, we overestimate the likelihood of positive events, and underestimate the likelihood of negative events.
For example, we underestimate our chances of getting divorced, being in a car accident, or suffering from cancer. We also believe our children will be particularly talented, expect to live longer than objective measures would suggest, and overestimate our success in the job market.
Because the future is so far away, it's easier to think that more good things will happen than bad things. As a college student, I used to think that after graduation all my problems would be solved magically. This is how most of us feel, fantasizing about the future and living in dreamland until reality hits.
Our buying patterns and choices are influenced by optimism in the following ways
Our risk-taking is higher
Because we think we know everything, we don't evaluate options
Reality doesn't match our expectations
Feeling less risky
Researchers found that people who felt optimistic about the future were willing to pay significantly more for a product than those who didn't feel optimistic. Home ownership is an example where 20% underestimated the total cost.
In addition, optimism bias can lead people to take on more debt than they can realistically afford, since they are more likely to believe that they will be able to make the payments in the future. It is for this reason that high earners have difficulty paying for their cars. Optimistic buyers may be more likely to buy things on credit because they think they'll be able to make the payments.
This explains why the bank managers call me so much 🙂
There aren't a lot of people who tell me they can't afford a new car. In most cases people will buy the more expensive models with all the packages. Nobody wants to tell his friend or neighbor, "I bought a chip car". There's nothing better than showing off and bragging about your new CUV with all the extras you won't use. This can eventually lead to financial difficulties, as well as stress and anxiety.
“Life insurance isn't for me”
The same study also found that people who felt more optimistic made riskier decisions, like buying a less safe car or investing in a speculative stock.
My favorite example is life insurance because it shows how we evaluate risk, especially when there's uncertainty.
It turns out that more than half of people without life insurance don't have it because they don't like thinking about dying. In America, 46 million people don't have life insurance but say they need it.
That's like saying I don't want to think about being overweight while eating junk food. Or I don't think about the damage using drugs can do to my body. If that's the case, we should remove the police and military because we don't want to think about all the bad stuff that could happen.
It's human nature to ignore stuff we don't know how to handle and hope it'll all work out in the end. Wishful thinking only exists in our heads. Life's not a movie, we have to face challenges, deal with tough situations, and make risky decisions
Tali Sharot shows us how optimism bias creeps into our lives in her TED talk. Sharot asks you a simple question to prove his point. Are you a better driver than the average? Most people say they're above average. Statistically, this isn't possible
Other ways we are affected by the optimism bias
Buyers who think the first offer they get is the best are less likely to compare shops or negotiate for a better price.
When you're optimistic, you're more likely to make impulsive purchases and to ignore alternatives.
Buyers may be influenced by optimism bias to make decisions that are not in their best interests, such as choosing an unreliable vehicle
The riskier investments
The study that was made in pakistan named: Impact of Optimism Bias on Investment Decision: Evidence from Islamabad Stock Exchange, Pakistan can be summarized the following way
There is a relationship between optimism bias and investor decision. This suggests that investors rely on their beliefs and personal judgment. They overestimate their own perception, which misdirects their decision-making. The result is that investors make irrational judgments. Hence, biases are responsible for an investor's irrational behavior.
The solution
Overestimating is ingrained in our DNA, and even science can't explain it. Because we can't change the evolution of thousands of years of our biology in one moment, we have to come up with strategies. Let me share with you some techniques for overcoming this bias. When you've got biased thinking, it's like looking through dirty water to see what's below. One big problem with optimism bias is that it's hard to spot, and it's hard to handle even when you're aware of it.
You can deal with this bias in a couple of ways
Awareness of what contributes to optimism
Challenging beliefs by asking questions
Raising awareness
Often, we don't consider all the possible obstacles before making a decision because we think we have all the facts. A couple of weeks ago I had to choose what second hand car to buy. It wasn't until I talked to a service department that I realized I wasn't getting all the info I needed.
We might also overestimate a product's long-term performance. When you buy a new car, you think it won't break down because it's new and has a warranty. It is a fact that even brand new cars have problems because there is a production error. It's important to be aware of these tendencies so that you can adjust your expectations accordingly.
Gathering relevant info
One of the ways to overcome bias is to make sure that you have all the information you need before making any estimates. This means doing your research, talking to experts, and gathering as much data as possible. One of the most common regrets of buyers is that they did not spend enough time researching and comparing different options before making a final decision. You'll be able to make more accurate predictions if you collect all the relevant information.
Refernce points
The other way to beat optimism bias is to use reference points. Rather than just making assumptions, base your predictions on data or previous experience. Don't just trust rumors and other people's opinions when making a big purchase. Make sure your data is accurate by using reliable sources such as consumer reports and past purchases of others. Using reference points can help you make more realistic predictions.
Possible downsides
Optimism bias can lead to problems if people are consistently too optimistic in their expectations about the future. When you're looking for a new house, you might underestimate how much time you'll need to invest. Also, I see people don't take into account what will happen in their lives in the future. Maybe you're single now, but that could change soon, and you'll need a bigger place
Challenge biased beliefs by asking questions
One of my favorite ways to overcome optimism is to challenge biased beliefs. For example, I can ask you some questions and generate specific scenarios
If you could buy a new car for the same price as the one you have before your lease ends, what would you do?
It's also possible to rate the likelihood of different outcomes
"How likely is it that your car will break down in the next year?"
Another fun way is to use debiasing techniques. We can, for example, generate counterarguments to our optimism
What are some reasons why you might be incorrect about your choice?
You can also ask people what would happen if their optimistic beliefs weren't realized
What do you do if you find out your car uses twice as much gas per mile?
Use those questions and see how it affects your mindset. It's like any tool, you have to practice it to get better.
Conclusions
The bottom line is that optimism bias can lead us to make poor decisions and overestimate our ability to achieve our goals. By being aware of it, we can look for signs that we are being too optimistic and take measures to adjust our expectations accordingly.
We can use tools and resources like comparison shopping websites, financial calculators, educational materials, and debiasing techniques to make better choices and ensure that our decisions are based on reality. With a little effort, we can avoid the pitfalls of optimism bias and make well-informed decisions that are in line with our goals.
Nikita