Significance What drives innovation, risk taking, and investment booms? We study these phenomena using a model of decision making by firms that make biased observations of prior returns. We assume that firms are more likely to observe large successes than small successes or failures. As a result, firms tend to become overly optimistic, leading to irrational booms in investment. Booms may eventually collapse, or they may last forever. We describe the cultural evolutionary sources of these effects. Evolution of investment behavior is driven not only by copying successful strategies, but also by cognitive reasoning about which behaviors are more likely to succeed. This account provides an explanation for investment booms, merger and IPO waves, and waves of technological innovation.