I’m pretty fascinated by this chart from the McKinsey Quarterly, which is a great demonstration of the optimism bias. The chart captures the earnings estimates of equity analysts for S&P 500 companies. The downward slope of these yellow lines is what happens when our hopeful projections meet dismal reality:
Needless to say, these estimates come from highly paid professionals, with access to vast amounts of data. (They’re also making projections about the relatively near future.) Unfortunately, all that data is no match for a deep-seated bias, which leads us to accentuate the positive and downplay the prospect of potential losses. (This helps explain why earnings projections are even less accurate during economic downturns.) Interestingly, the only segment of the population that isn’t vulnerable to the optimism bias are people with major depressive disorder. Maybe Wall Street should think about hiring them.