Why it is optimal to be optimistic

Adam and Ben want to start coffee shop chains in country C. Adam estimates the potential market size to be 1 billion. This estimate turns out to be correct in the end. Ben estimates the potential market size to be 10 billion. He argues that people in country C drink little coffee. The potential market size for coffee is huge. Ben, being optimistic and energetic, is an infectious promoter. He raised 10 billion dollar in the capital market. Adam, meanwhile, raised 1 billion dollar in the capital market.

Ben’s company has ten times more cash to burn than Adam. Ben sells coffee at great loss. To attract customers, Adam has to sell at loss as well. Soon, Adam’s company run out of cash and went bankrupt. Adam lost everything, including his own 100 million dollar seed money. With the bankruptcy of Adam’s company, Ben becomes the monopoly in coffee business. His company valuation jumps to 20 billion dollars. At this point, Ben exercises all the options and liquidates his shares. Ben becomes a billionaire.

Eventually, the market settles down. Ben’s company valuation settles around one billion dollar. Adam was right. The market size is indeed around one billion dollar. Ben overstated market value by ten times. Yet Ben becomes billionaire. Adam loses everything.

Ben’s success is credited to his pioneering effort about the coffee business. Adam, being a loser, loses all his credibility.

This is a general pattern. In a company, the ones making more optimistic projections get bigger staff, larger budget and higher positions. When business is not as good as projected, the people at higher positions get to decide who to layoff. The ones making more accurate projections, with smaller staff and lower positions, are laid off.

In politics, the ones making rosier promises get elected. The honest ones are dumped by voters. That is why we are often unprepared for adverse events. Those who make warnings about adverse events are dumped by us and are losers. Nobody pay attention to losers. In Greek myth, Cassandra made accurate predictions. But no one believed her.

In monetary policy, low interest rate represents an optimistic outlook. With lower interest rate, fixed cost investment increases. This will over saturate the market and squeeze potential competitors.