The overconfidence bias figures prominently in the history of consumer credit in the U.S.  Lendol Calder explains that, as U.S. consumers after World War II took on more and more debt, “living beyond their income but not beyond their credit,” they palliated their anxiety with “the optimistic conviction that . . .  ‘We’ll make it somehow.  Things will always be better—maybe a lot better.’”   Robert Manning suggests that optimistic economic projections by the Reagan and Bush administrations led many consumers to use more and more credit to achieve lifestyles commensurate with better days that surely lay ahead.   “It can’t happen to me” overconfidence bias eventually led more and more consumers to underestimate the likelihood that they would fall victim to a simple mismatch between present borrowing and future income or to an unexpected liquidity crisis.   Moreover, laboring under the illusion of control, consumers budgeted—some more carefully than others—enhancing their feeling of control over their financial futures and invincibility to future financial crisis.  Given the complexities of interest rate calculations and the vagaries of a family budget, though, it is not difficult to see how overconfidence has lured many a consumer too close to the edge of financial stability.  Real “control” over our financial futures is elusive, indeed, and much more so for some than for others. 

B.  The Availability Heuristic

In studying how individuals use mental shortcuts to simplify predictions of the likelihood of future events—particularly negative events—“researchers have uncovered a veritable fool’s gold mine of nonrational cognitive anomalies.”   For example, researchers have shown that individuals most often tend to assess the likelihood of a future event based on how easily similar events can be recalled, in other words, how “available” such an event is.   Three factors especially influence the “availability” of a negative event:  frequency, recency, and salience.  If a person has witnessed an event (or reports of an event) frequently or recently—such as recent media coverage of airplane or car accidents—that person will tend to overestimate the likelihood of a similar accident occurring in the future.  And if a person witnesses one particularly salient occurrence of a negative event—such as a particularly violent crash or a nuclear catastrophe—that vivid image will form a readily “available” basis for overestimation of the risk of similar incidents in the future.  

The converse is also true.  That is, if instances of a negative event are infrequent or distant, or if a negative event or the factors that led to it are not salient, people will underestimate the likelihood of a similar future negative event.  For example, people discount the likelihood of cancer or lung disease because the risk of one cigarette at a time lacks salience.  Indeed, given the underlying effects of the overconfidence bias, one would expect individuals to underestimate considerably the risk of negative events that are not “available.”