Optimism bias can induce people to underinvest in primary and preventive care and other risk-reducing behaviors, such as abstinence from smoking. The overconfident may also inadequately react to legal threats and incentives, undermining the deterrent effect of liability rules.
Overconfidence causes many people to grossly underestimate their odds of making a payment late. Statistically, many people are quite likely to make at least one payment late due to the normal range of difficulties and delays in day-to-day life. Overconfidence bias causes these people to grossly underestimate the odds of this happening and therefore to accept grossly punitive fees and rates (e.g., an interest rate of nearly 30% on a credit card or similar line of credit) as a result of otherwise minor transgressions such as a late payment. Companies have exploited this bias by increasing interest rates to punitive rates for any late payment, even if it is to another creditor.
Overconfidence bias also causes many people to substantially underestimate the probability of having serious financial or liquidity problems, such as from a sudden job loss or severe illness. This can cause them to take on excessive debt under the expectation that they will do better than average in the future and be readily able to pay it off.
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