The role of optimism in the probabilistic assessment of risk: A second look at calibration of probabilities

Emotional factors may have a profound influence on the choices people make. A review of the literature suggests that under some conditions optimism may be a significant factor in the probabilistic assessment of risk. Existing rsearch primarily describes the relation of only cognitive factors to the calibration of probabilities. Scholars predict that the interaction of cognitive and emotional factors will be of increasing importance to future research.

In a seminal essay, Kahneman and Lovallo [4] described the conflicting biases of unjustified optimism and unreasonable risk aversion as resulting in overly bold forecasts and timid choices. They asserted that people and organizations often expose themselves to risk because they misjudge the probability of risk. Although unjustified optimism may be a cause of differences between subjective and objective probabilities, substantial quantitative proof has not been offered.

This article has two purposes. The first is to review existing literature in optimism and calibration of probabilities. The second is to propose a second look at the assessment of probabilistic risk functions under the influence of optimism. Quantitative research in this area could enhance both the prediction of people's choices and the explanation of those choices.