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Intoxicated with Pessimism

"Optimism sounds like a sales pitch. Pessimism sounds like someone is trying to help you." - Morgan Housel

Bill has financial freedom. Bill comes and goes as he pleases. He's the master of his schedule. Curious about Bill's approach to markets and investing, you ask him...

"How do you feel about the stock market? Isn't it getting a bit frothy?"

Bill: "I don't pay much attention. I expect the market to trend higher over the next 30 years with the standard disruptions along the way."

You think to yourself, that's it? Maybe this Bill guy isn't so smart after all. His approach seems a bit lazy. Bill has his head in the sand with all of these potential risks out there. He might have been lucky in the past, but he's setting himself up for failure.

Now, let's try that again. This time Bill answers our original question with a heavy dose of doom.

"How do you feel about the stock market? Isn't it getting a bit frothy?"

Bill: Oh yes! The Fed is going to trigger runaway hyperinflation, the dollar is going to collapse, the government is going to fail due to massive debt, and the stock market is going to lose 80% of its value by the end of next year.

You lean in, captivated by Bill. Man, this guy is an investing savant. I'm going to change my allocation and tell my friends about what he said.

Why do people love a good train wreck, but easily dismiss boring, realistic scenarios?

We love a good story.

We love narratives.

We dig being privy to exclusive information.

Without a doubt, humans have a love affair with pessimism.

If I told you your newlywed neighbors would be happily married for 50 years, you might say, good for them, but you wouldn't give it a second thought.

If I told you the newlywed couple were both having an affair a month into their marriage, you would want to hear more.

Positive scenarios delivered by optimists are shrugged off as aloof and mundane.

Negative scenarios delivered by pessimists are given a microphone.

"Tell someone that everything will be ok and they’ll shrug you off. Tell someone they're in danger and they’ll hang on your every word." Morgan Housel

Financial media loves this phenomenon. They don’t bring on talking heads that say investing is boring, nothing to see here, go on with your day. They bring on people that say outlandish stuff, the world is ending and here’s why.

Why do humans have such an infatuation with the world going to hell in a hand basket?

Humans hate losses much more than we cherish gains.

No one wants to be a bag holder. It wouldn't feel great to lose 40% of your money when someone saw the blood bath coming.

We are tribal beings. In the early days, being separated from the tribe meant death. It's been said it's better to be wrong with the crowd than wrong by yourself.

Pessimism comes off as sophisticated. Optimism comes off as oblivious.

Catastrophic predications get more attention, ratings, and clicks.

Financial pessimism is especially alluring because so many people own stocks or have their livelihood dependent on the ebb and flow of the economy.

We are disposed to being pessimistic. Balance it out with acknowledging what could go right. Read positive market commentary. Have a basic understanding of the frequency of bear markets. Have a basic understanding of how often the market "boringly" drifts higher. Find alternative views that challenge your pessimism, rather than confirm it.

If you can't help being a perma-pessimist about financial markets, find an objective third-party to manage your funds or offer advice.

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