Adam Smith: father of behavioral economics

A strong case can be made that Adam Smith is the first behavioral economist, for he diagnoses not one but two major cognitive quirks in Paragraph 26 of Chapter 10 of Book I of The Wealth of Nations: the overconfidence effect and optimism bias. Moreover, according to the Scottish philosopher-economist, our overconfidence in “our own good fortune” distorts our risk-calculus abilities, causing us to overvalue potential rewards (“the chance of gain”) and to underestimate potential risks (“the chance of loss”): “The over-weening conceit which the greater part of men have of their own abilities is an ancient evil remarked by the philosophers and moralists of all ages. Their absurd presumption in their own good fortune has been less taken notice of. It is, however, if possible, still more universal. There is no man living who, when in tolerable health and spirits, has not some share of it. The chance of gain is by every man more or less overvalued, and the chance of loss is by most men…