“In addition, overconfident managers benefit the firm by expending more effort than rational managers, as they overestimate the value of that effort,” he says. Crvenkovic says that cognitive bias doesn’t occur solely to lead us into error; it is a type of psychological armour. Just as attribution error can lead people to mistakenly take credit for positive things that occur, blaming external factors when negative things happen – rightly or wrongly –enables people to try and try again, ultimately increasing their chance of success. Tempered optimism So optimism is not bad, and funds managers, as Kahneman says, should not try to root it out of themselves or their organisations.

“Companies have to promote optimism to keep employees motivated and focussed,” he says. “At the same time, though, they have to generate realistic forecasts, especially when large amounts of money are at stake. Aggressive goals can motivate the troops and improve the chances of success, but outside-view forecasts should be used to decide whether or not to make the commitment in the first place.” According to Gray, you have to have a definite investment philosophy. You’ve got to really understand what it is you’re doing and why you have a chance of outperforming. “Once you have the core values based on realistic signals, then you need to be totally optimistic and believe in it – that’s the only way you’ll get through the tough times.

“Without core values, changing at every signal, you’ll end up churning your portfolio and underperforming.” While optimism my lead us into error, an objectively realistic outlook is probably not possible, nor even desirable. As the economist John Maynard Keynes once said: “If the animal spirits are dimmed and spontaneous optimism falters, leaving us to depend on nothing but mathematical expectations, enterprise will fade and die.”