The FloodFlash behavioural science series: Optimism Bias  

Last time, we explored availability bias. This is the tendency to use information that comes to mind quickly and easily when making decisions. Check out the full article here. This month, we’re delving into optimism bias. We’ll cover what it is and what it means for flooding and flood insurance.

What is optimism bias?

Optimism bias is our inclination to overestimate the likelihood of experiencing positive events and underestimate the likelihood of experiencing negative events. Optimism bias involves two key assumptions. The first is that we possess more positive traits than the average person. The second is that we have some level of control over our surrounding environment. 

Many people reading this may think, perhaps optimistically, that optimism bias does not affect them. However, an estimated 80% of the global population possess optimism bias to some degree. This is compared to only 10% of the global population estimated to have pessimism bias – the belief that negative events are more likely to happen to them. This bias can be tricky to unwrap at times. Thinking positively in measured doses is a good thing. It allows us to be innovative and try new things. It limits our worrying over uncertainties. Most importantly, it allows us to progress as individuals and as a society. 

Without optimism bias, the human species would not have progressed.

Shelly Laslett, CEO at Vitae

However, optimism bias can have negative effects. If someone demonstrates high levels of optimism bias, they will regularly underestimate risk. This may cause rash decisions, overambitious plans, and even dangerous miscalculations. 

Optimism bias in action

Optimism bias is why many people believe they are more likely to win the lottery or start a successful business. It is also why people believe they are less likely be in a plane crash, be a victim of a crime, or be diagnosed with an illness. When a neuroscientist asked people to estimate their risk of contracting cancer at some point in their lifetime, 10% thought they were at risk. At the time, the more accurate answer was 30%.

Let’s consider how different people may react to the same event. For example, the weather forecast giving a high chance of rain. Someone with a high degree of optimism bias may simply think ‘it won’t rain’ and leave their coat at home. If a person has a lower degree of optimism bias, they may think ‘it may rain, but it won’t be that heavy or that long’. Finally, a person with pessimism bias may think ‘it will be heavy rain all afternoon, so I’ll just stay at home.’

Optimism bias can have negative consequences.
People will react differently when given the same set of facts – like a weather forecast – depending on their level of optimism bias.

While miscalculating the weather may not have drastic consequences, optimism bias can lead to significant impacts. For example, the unrealistic expectations of financial growth and success is argued to be one of the core reasons for the financial crash in 2008. The Olympic Games are notoriously over-budget, partly due to optimistic budgets and timescales. In fact, the average cost over-run from bid estimates for the Games since 1976 has been more than 200%. Optimism bias also makes us less likely to take action on climate change. It leads to a false hope that the climate will ‘sort itself out’, and that we, as individuals, won’t experience the negative effects.

What does optimism bias mean for perceptions of flooding?

Many people are at risk from natural disasters, including flooding. According to the Emergency Event Database, there were 432 ‘disastrous events’ in 2021 related to natural hazards worldwide. These affected at least 100 million people. Flooding accounted for over half of these with 223 events, up from up from an average of 163 annual flood occurrences recorded across the 2001-2020 period. 

However, when it comes to natural disasters like flooding, optimism bias leads many people to believe they are less at risk than the average person. Even when people are aware of their flood risk, they often underestimate the dangers flooding may pose. This is still the case during a flood. For example, many will venture out into a flood on foot or in a car, increasing their chance of injury or fatality. 

Hurricane Ian will likely be remembered as one of the most destructive hurricanes in US history. Yet, despite evacuation orders and warnings, many stayed in the area. While many are unfortunately unable to evacuate, others often believe they can weather the storm.

People may venture out during a flood, believing that they are less likely than most to be harmed.
People with a high degree of optimism bias may travel during a flood, believing that they won’t be negatively affected.

What does optimism bias mean for flood risk and insurance?

Optimism bias can lead to a lack of preparation for flooding. If people do not believe they will flood, they may not take precautions. Why invest in physical flood resilience measures, take out insurance, or raise belongings if you aren’t going to flood? But with flooding one of the most widespread, common, and devastating natural disasters, it pays to reign in false optimism. 

40% of businesses fail to reopen after a flood event.

Business in the Community

As with availability bias, the challenge for brokers and insurers is to find ways to communicate an individual’s flood risk so that they are aware of, and act on, their risk. While flooding may be more likely in certain areas of the world, flooding can happen anywhere. By recognising your flood risk and ensuring you are prepared if a flood does happen – damage and losses can be minimised.

FloodFlash prices policies based on the unique risk at the insured property. You can choose your trigger depth and payout values, meaning you can find a policy that works for your property and your budget. Smart quote – our latest product update – gives an initial suggested quote based on the characteristics of the insured property. Accompanying insights explain the potential damage a flood may cause to the property. These help clients to be realistic, rather than optimistic, about the financial and physical impacts a flood may have.