Some of these managers truly believe they have a gift or unique ability, and they are unaware of the enormous infrastructure that goes into doing things and supporting them.” The endowment effect is another well-known bias in the behavioural finance literature that says people tend to place more value on things they own, and confirmation bias leads people to ignore information that contradicts their convictions while overweighting information that supports them. Gray says he sees these errors in judgement all the time. “It’s not rational – but boy, you’ll do it. I’ve seen it on committees over and over again. Once someone goes into a deal and they start to get to know it and believe in it, their human capital is at stake. They’re not going to give up lightly, and they become overly optimistic. They need to be to keep pushing it through.” Industry structure bakes exuberance in People’s tendency to be optimistic is reinforced and even exacerbated by organisational structures.

Trying to counteract such biases is difficult because pessimism just isn’t popular. While pessimists may actually be more accurate in their assessments, no-one thinks an organisation full of them would be desirable. People don’t like it when you talk down the market, Ron Bird says. “People don’t want to hear those types of stories. Even if you convince them to accede that the market is overpriced, they still tell themselves ‘it’s not going to correct today’. “Psychologically, they want the good times to continue,” he says. “I have even experienced where a client sacked us simply because they did not like hearing our pessimistic views of markets.” Clients, indeed, also don’t want to hear their managers telling them that bad times are just around the corner – especially if it doesn’t happen straight away, and they underperform for a short period. Kahneman says that when pessimistic opinions are suppressed, while optimistic ones are rewarded, an organisation’s ability to think critically is undermined.

The optimistic biases of individual employees become mutually reinforcing and unrealistic views are validated by the group. Managers have to be optimistic about their ability to convince clients to allocate them money, Bird says. And they can do it because it’s very hard for a client to validate the likelihood of their claims – there’s too much randomness in the market. “It takes so long to establish whether the manager truly has any skill, that the clients can’t perceive it.” It takes a manager 80 years to prove itself – before it shows up in the numbers or past performance, he says. “This is a ‘trust-me’ industry – trust me, I’ve got skill.” GMO’s Gray says the industry doesn’t have much choice but to be generally optimistic. “For this industry it [being optimistic] is almost something you have to do,” he says. “The client wants to hear that you are confident, while they also know that you can’t be too confident. So the intelligent client is really gauging your calibration, between what you say you can deliver and what you actually can deliver.”