Adam Smith on the risks of youth

Thus far this week (see here and here), we have seen why Adam Smith can be considered to be the founder of behavioral economics. What Smith calls this “absurd presumption in [our] own good fortune” (i.e. optimism bias), combined with the pull of our emotions, clouds our ability to measure probabilities and make mathematically rational decisions. In summary, Smith explains in Book I, Chapter 10 of The Wealth of Nations how optimism bias and the emotional appeal of large prizes can lead us to overestimate the probability of winning in certain situations, such as state-run lotteries. (Para. 27) But at the same time, he also shows how these cognitive quirks can lead us to underestimate the probability of more distant or remote risks of misfortune. (Para. 28) Next, in Paragraphs 29 and 32 of Chapter 10 of Book I of his magnum opus, Smith further observes that young people are especially risk-seeking: “The contempt of risk and the presumptuous hope of success are in no period of life more…