By Richard Thaler and Cass Sunstein.
People are unrealistically optimistic even when the stakes are high. About 50 percent of marriages end in divorce, and this is a statistic most people have heard. But around the time of the ceremony, almost all couples believe that there is approximately a zero percent chance that their marriage will end in divorce — even those who have already been divorced! (Second marriage, Samual Johnson once quipped, ‘is the triumph of hope over experience.’) A similar point applies to entrepreneurs starting new businesses, where the failure rate is at least 50 percent. In one survey of people staring new businesses (typically small businesses, such a contracting firms, restaurants, and salons), respondents were asked two questions: (a) What do you think is the chance of success for a typical business like yours? (b) What is your chance of success? The most common answers to these questions were 50 percent and 90 percent, respectively, and many said 100 percent to to the second question.
Unrealistic optimism can explain a lot of individual risk taking, especially in the domain of risks to life and health.