“For reasons I have never understood, people like to hear that the world is going to hell.”
—Historian Deirdre McCloskey
Optimism is the best bet for most people because the world tends to get better for most people most of the time.
But pessimism holds a special place in our hearts. Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.
Before we go further we should define what optimism is. Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism. It’s not complicated. It’s not guaranteed, either. It’s just the most reasonable bet for most people, most of the time. The late statistician Hans Rosling put it differently: “I am not an optimist. I am a very serious possibilist.”
Now we can discuss optimism’s more compelling sibling: pessimism.
December 29th, 2008.
The worst year for the economy in modern history is about to close. Stock markets around the world had collapsed. The global financial system was on day-to-day life support. Unemployment was surging.
As things looked like they couldn’t get worse, The Wall Street Journal published a story arguing that we hadn’t seen anything yet. It ran a front-page article on the outlook of a Russian professor named Igor Panarin whose economic views rival the flair of science fiction writers.
The Journal wrote:
Around the end of June 2010, or early July, [Panarin] says, the U.S. will break into six pieces—with Alaska reverting to Russian control ... California will form the nucleus of what he calls “The Californian Republic,” and will be part of China or under Chinese influence. Texas will be the heart of “The Texas Republic,” a cluster of states that will go to Mexico or fall under Mexican influence. Washington, D.C., and New York will be part of an “Atlantic America” that may join the European Union. Canada will grab a group of Northern states Prof. Panarin calls “The Central North American Republic.” Hawaii, he suggests, will be a protectorate of Japan or China, and Alaska will be subsumed into Russia.⁵⁵
This was not the ramblings of a backroom blog or tinfoil-hat newsletter. This was on the front page of the most prestigious financial newspaper in the world.
It is fine to be pessimistic about the economy. It’s even OK to be apocalyptic. History is full of examples of countries experiencing not just recessions, but disintegrations.
The interesting thing about Panarin-type stories is that their polar opposite—forecasts of outrageous optimism—are rarely taken as seriously as prophets of doom.
Take Japan in the late 1940s. The nation was gutted by defeat from World War II in every way—economically, industrially, culturally, socially. A brutal winter in 1946 caused a famine that limited food to less than 800 calories per person per day.⁵⁶
Imagine if a Japanese academic had written a newspaper article during this time that said:
Chin up, everyone. Within our lifetime our economy will grow to almost 15 times the size it was before the end of the war. Our life expectancy will nearly double. Our stock market will produce returns like any country in history has rarely seen. We will go more than 40 years without ever seeing unemployment top 6%. We will become a world leader in electronic innovation and corporate managerial systems. Before long we will be so rich that we will own some of the most prized real estate in the United States. Americans, by the way, will be our closest ally and will try to copy our economic insights.
They would have been summarily laughed out of the room and asked to seek a medical evaluation.
Keep in mind the description above is what actually happened in Japan in the generation after the war. But the mirror opposite of Panarin looks absurd in a way a forecast of doom doesn’t.
Pessimism just sounds smarter and more plausible than optimism.
Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.
If a smart person tells me they have a stock pick that’s going to rise 10-fold in the next year, I will immediately write them off as full of nonsense.
If someone who’s full of nonsense tells me that a stock I own is about to collapse because it’s an accounting fraud, I will clear my calendar and listen to their every word.
Say we’ll have a big recession and newspapers will call you. Say we’re headed for average growth and no one particularly cares. Say we’re nearing the next Great Depression and you’ll get on TV. But mention that good times are ahead, or markets have room to run, or that a company has huge potential, and a common reaction from commentators and spectators alike is that you are either a salesman or comically aloof of risks.
The investing newsletter industry has known this for years, and is now populated by prophets of doom despite operating in an environment where the stock market has gone up 17,000-fold in the last century (including dividends).
This is true beyond finance. Matt Ridley wrote in his book The Rational Optimist:
A constant drumbeat of pessimism usually drowns out any triumphalist song ... If you say the world has been getting better you may get away with being called naïve and insensitive. If you say the world is going to go on getting better, you are considered embarrassingly mad. If, on the other hand, you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize. In my own adult lifetime ... the fashionable reasons for pessimism changed, but the pessimism was constant.
“Every group of people I ask thinks the world is more frightening, more violent, and more hopeless—in short, more dramatic—than it really is,” Hans Rosling wrote in his book Factfulness.
When you realize how much progress humans can make during a lifetime in everything from economic growth to medical breakthroughs to stock market gains to social equality, you would think optimism would gain more attention than pessimism. And yet.
The intellectual allure of pessimism has been known for ages. John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”
The question is, why? And how does it impact how we think about money?
Let’s repeat the premise that no one is crazy.
There are valid reasons why pessimism is seductive when dealing with money. It just helps to know what they are to ensure we don’t take them too far.
Part of it is instinctual and unavoidable. Kahneman says the asymmetric aversion to loss is an evolutionary shield. He writes:
When directly compared or weighted against each other, losses loom larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.
But a few other things make financial pessimism easy, common, and more persuasive than optimism.
One is that money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.
That isn’t true of, say, weather. A hurricane barreling down on Florida poses no direct risk to 92% of Americans. But a recession barreling down on the economy could impact every single person—including you, so pay attention.
This goes for something as specific as the stock market. More than half of all American households directly own stocks.⁵⁷ Even among those that don’t, the stock market’s gyrations are promoted so heavily in the media that the Dow Jones Industrial Average might be the stock-less household’s most-watched economic barometer.
Stocks rising 1% might be briefly mentioned in the evening news. But a 1% fall will be reported in bold, all-caps letters usually written in blood red. The asymmetry is hard to avoid.
And while few question or try to explain why the market went up—isn’t it supposed to go up?—there is almost always an attempt to explain why it went down.
Are investors worried about economic growth?
Did the Fed screw things up again?
Are politicians making bad decisions?
Is there another shoe to drop?
Narratives about why a decline occurred make them easier to talk about, worry about, and frame a story around what you think will happen next—usually, more of the same.
Even if you don’t own stocks, those kind of things will grab your attention. Only 2.5% of Americans owned stocks on the eve of the great crash of 1929 that sparked the Great Depression. But the majority of Americans—if not the world—watched in amazement as the market collapsed, wondering what it signaled about their own fate. This was true whether you were a lawyer or a farmer or a car mechanic.
Historian Eric Rauchway writes:
This fall in value immediately afflicted only a few Americans. But so closely had the others watched the market and regarded it as an index of their fates that they suddenly stopped much of their economic activity. As the economist Joseph Schumpeter later wrote, “people felt that the ground under their feet was giving way.”⁵⁸
There are two topics that will affect your life whether you are interested in them or not: money and health. While health issues tend to be individual, money issues are more systemic. In a connected system where one person’s decisions can affect everyone else, it’s understandable why financial risks gain a spotlight and capture attention in a way few other topics can.
Another is that pessimists often extrapolate present trends without accounting for how markets adapt.
In 2008 environmentalist Lester Brown wrote: “By 2030 China would need 98 million barrels of oil a day. The world is currently producing 85 million barrels a day and may never produce much more than that. There go the world’s oil reserves.”⁵⁹
He’s right. The world would run out of oil in that scenario.
But that’s not how markets work.
There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.
Consider what happened to oil immediately after Brown’s prediction.
Oil prices surged in 2008 as growing global demand—much of it from China—crept up to potential output. A barrel of oil sold for $20 in 2001 and $138 by 2008.⁶⁰
The new price meant drilling oil was like pulling gold out of the ground. The incentives for oil producers changed dramatically. Hard-to-tap oil supplies that weren’t worth the fight at $20 a barrel—the cost of drilling didn’t offset the price you could sell it for—became the bonanza of a lifetime now that you could sell a barrel for $138.
That sparked a surge of new fracking and horizontal drilling technologies.
The Earth has had roughly the same amount of oil reserves for all of human history. And we’ve known where the big oil deposits are for some time. What changes is the technology we have that lets us economically pull the stuff out of the ground. Oil historian Daniel Yergin writes: “86% of oil reserves in the United States are the result not of what is estimated at time of discovery but of the revisions” that come when our technology improves.
That’s what happened as fracking took off in 2008. In the United States alone oil production went from roughly five million barrels per day in 2008 to 13 million by 2019.⁶¹ World oil production is now over 100 million barrels per day—some 20% above what Brown assumed was the high mark.
To a pessimist extrapolating oil trends in 2008, of course things looked bad. To a realist who understood that necessity is the mother of all invention, it was far less scary.
Assuming that something ugly will stay ugly is an easy forecast to make. And it’s persuasive, because it doesn’t require imagining the world changing. But problems correct and people adapt. Threats incentivize solutions in equal magnitude. That’s a common plot of economic history that is too easily forgotten by pessimists who forecast in straight lines.
A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore.
There are lots of overnight tragedies. There are rarely overnight miracles.
On January 5th, 1889, the Detroit Free Press pushed back against the long-held dream that man could one day fly like a bird. Airplanes, the paper wrote, “appear impossible”:
The smallest possible weight of a flying machine, with the necessary fuel and engineer, could not be less than 300 or 400 pounds … but there is a low limit of weight, certainly not much beyond fifty pounds, beyond which it is impossible for an animal to fly. Nature has reached this limit, and with her utmost effort has failed to pass it.
Six months later, Orville Wright dropped out of high school to help his brother, Wilbur, tinker in their backyard shed to build a printing press. It was the brothers’ first joint invention. It would not be their last.
If you had to make a list of the most important inventions of the 20th century, the airplane would be at least top five, if not number one. The airplane changed everything. It started world wars, it ended world wars. It connected the world, bridging gaps between cities and rural communities; oceans and countries.
But the story of the Wright Brothers’ quest to build the first plane has a fascinating twist.
After they conquered flight, no one seemed to notice. Nobody seemed to care.
In his 1952 book on American history, Frederick Lewis Allen wrote:
Several years went by before the public grasped what the Wrights were doing; people were so convinced that flying was impossible that most of those who saw them flying about Dayton [Ohio] in 1905 decided that what they had seen must be some trick without significance—somewhat as most people today would regard a demonstration of, say, telepathy. It was not until May, 1908—nearly four and a half years after the Wright’s first flight—that experienced reporters were sent to observe what they were doing, experienced editors gave full credence to these reporters’ excited dispatches, and the world at last woke up to the fact that human flight had been successfully accomplished.
Even after people caught on to the plane’s wonder, they underestimated it for years.
First it was seen mainly as a military weapon. Then a rich person’s toy. Then, perhaps, used to transport a few people.
The Washington Post wrote in 1909: “There will never be such a thing as commercial aerial freighters. Freight will continue to drag its slow weight across the patient earth.” The first cargo plane took off five months later.
Now compare that slow, years-long awakening to becoming optimistic about the airplane to how quickly people pay attention to drivers of pessimism, like a corporate bankruptcy.
Or a major war.
Or a plane crash. Some of the first mentions of the Wright’s plane came in 1908 when an Army Lieutenant named Thomas Selfridge was killed during a demonstration flight.⁶²
Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.
It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together.
Consider the progress of medicine. Looking at the last year will do you little good. Any single decade won’t do much better. But looking at the last 50 years will show something extraordinary. For example, the age-adjusted death rate per capita from heart disease has declined more than 70% since 1965, according to the National Institute of Health.⁶³ A 70% decline in heart-disease death is enough to save something like half a million American lives per year. Picture the population of Atlanta saved every year. But since that progress happened so slowly, it captures less attention than quick, sudden losses like terrorism, plane crashes, or natural disasters. We could have a Hurricane Katrina five times a week, every week—imagine how much attention that would receive—and it would not offset the number of annual lives saved by the decline in heart disease in the last 50 years.
This same thing applies to business, where it takes years to realize how important a product or company is, but failures can happen overnight.
And in stock markets, where a 40% decline that takes place in six months will draw congressional investigations, but a 140% gain that takes place over six years can go virtually unnoticed.
And in careers, where reputations take a lifetime to build and a single email to destroy.
The short sting of pessimism prevails while the powerful pull of optimism goes unnoticed.
This underscores an important point made previously in this book: In investing you must identify the price of success—volatility and loss amid the long backdrop of growth—and be willing to pay it.
In 2004 The New York Times interviewed Stephen Hawking, the scientist whose incurable motor-neuron disease left him paralyzed and unable to talk at age 21.
Through his computer, Hawking told the interviewer how excited he was to sell books to lay people.
“Are you always this cheerful?” the Times asked.
“My expectations were reduced to zero when I was 21. Everything since then has been a bonus,” he replied.
Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about.
Maybe that’s why it’s so seductive. Expecting things to be bad is the best way to be pleasantly surprised when they’re not.
Which, ironically, is something to be optimistic about.
Now, a short story about stories.