Investors need to be optimists. They need to believe that change is possible and that change is sometimes for the better. Without optimism, taking risk would be impossible.
But in investment and life, it is easy for pessimism to prevail. For one thing, pessimism can sound a lot smarter than optimism. Morgan Housel muses about this in his article “Why Does Pessimism Sound So Smart?” Say the world is going to hell, and you sound brilliant. Say all is good, and you sound naïve and dumb. It happens in all spheres of life. Housel quotes Harvard professor Teresa Amabile on how negative book reviews sound smarter than positive ones: “Only pessimism sounds profound. Optimism sounds superficial.”
And yet, the world is surely getting better in many ways. Look at long-term data on poverty, crime rates, or the number of democracies around the globe, and you’ll see everything is moving in the right direction — often dramatically so. The longer term the data, the clearer it is: Improvements in human life have been astounding.
There is good reason that we humans have been hard-wired to focus on bad things. Behavioral scientist Daniel Kahneman has pointed out that viewing threats as more urgent than opportunities increased our chances of survival. That is how we evolved.
But today, there are elements of cognitive distortion in our pessimism. Paul Dolan of the London School of Economics has suggested that people are over-influenced by recent ephemeral events. That is, it is easy for our brains to recall the bad things we just heard on the news. It is hard to grasp the full sweep of long-run human progress.
That is why people usually think there is more crime than there actually is. People believe that crime is increasing even in years it’s declining. And that is why people are generally optimistic about their own futures or locales but pessimistic about world prospects. There is good empirical evidence that across multiple countries people believe things are relatively good locally but going downhill nationally or globally.
That’s a recurring theme in James Fallows recent article in The Atlantic about his three-year journey across America (“How America is Putting Itself Back Together”). In spite of all the negative national rhetoric around us, Fallows finds unexpected pockets of economic dynamism and optimism in small towns and rust-belt cities across the country. In many places, people tell him that even though they worry about the nation as a whole, they believe their own cities or towns are moving in the right direction.
That is a reminder of how vigilant investors must be when it comes to the information and news that gets packaged for us every day. Think longer, think bigger, think differently, and look elsewhere.
A fine classic example of this is economist John Maynard Keynes’ essay “Economic Possibilities for Our Grandchildren.” Written in 1930 in the depths of the Depression, Keynes sees not a worn out economy, but a world where technological progress has been so fast that people have not yet adjusted to it. Yes, he envisions great things for future generations that today seem prescient.