Superoptimism is a behavioral bias due to many causes, most of which are either unknown or difficult to identify. Avoiding superoptimists should be part of risk management in every aspect of life, including the markets. Lately, we see many superoptimists: in technology, geopolitics, and, of course, markets.
The tech superoptimists believe that artificial intelligence will solve all the problems in the world. They never consider the possibility of things getting worse.
Geopolitics superoptimists think that multiple wars will impose a new world order and boost democratic values. They try to find all the excuses why these wars will not end in global annihilation.
Market superoptimists argue that inflation will fall, growth and employment will remain strong, and the stock market will continue to rise. They see no problems with the rapidly rising US public debt and insist that its level is irrelevant.
Optimism is a cognitive bias. It has helped the human race to evolve. On the other hand, superoptimism operates on the tails of cognitive biases and can be catastrophic, as it leaves little room for risk management when conditions and actions are extreme.
Being super bullish about any market is as dangerous as being super bearish. Superoptimists rely on the longer-term upward bias for their claims (there are a few accounts on social media with multiple posts every week), but when a 30% drawdown arrives, they have little advice to offer except to stay invested. Many of those people are also in the crypto space, always screaming “hodl.”
Being an optimist is a normal state. Avoiding superoptimists should be part of risk management. Often, a lack of an exit plan or a compromise is an indication of superoptimism.
If you found this article interesting, you may follow this blog via RSS or Email, or on Twitter
