Which Viewpoint Serves You Better?
There is an aspect to financial planning and investing that is inherently optimistic. You have to assume that there is a future to plan for and that you have some control over outcomes in that future. You have to believe in the potential of the companies in which you are investing and the power of the markets to reward your investments. At the same time, a great deal of attention should be paid to controlling risk, which runs counter to an optimistic approach. As we have talked a lot in this column about investment behaviours that are likely to result in positive future outcomes, this one explores mindsets that drive desirable behaviours.
We often describe people as optimists or pessimists using the glass half full / glass half empty analogy, and there are negative associations with both groups. Optimists are often portrayed by detractors as wearing rose-coloured glasses which allow them to ignore inconvenient aspects of the real situation, while pessimists are described as wet blankets who squelch creativity and innovation.
A more balanced approach might be the one psychologist Heidi Halvorson uses to express the difference between those with an optimistic mindset from those with a pessimistic one: she describes the main focus of each. Those we might characterize as pessimistic frame their goals in terms of what they have to lose, which she terms a prevention focus, so they take measures to keep them safe and secure. Those we describe as optimists focus on what they have to gain, or have a promotion focus, looking for opportunities to advance a goal and are prepared to take risks to attain rewards. Naturally, we tend to feel most comfortable with people who share our focus, and have more confidence in the decisions they make. Each group is also motivated to take action by different means: those focusing on what they will gain will seek out inspirational stories to keep them moving towards their goal, while the prevention-focused will be spurred to action by cautionary tales.
Each viewpoint has its strengths and weaknesses, depending upon the situation. On the optimist’s side of the scale, Halvorson places an ability to work quickly and brainstorm to find many alternatives. They are open to new ideas and seize opportunities when they present themselves. However, they tend to plan for best-case scenarios, lose steam without positive feedback, and feel depressed when things go wrong. Pessimists, on the other hand, tend to be accurate because they work slowly and with deliberation, and prepare for the worst case scenario. However, they are stressed by short deadlines, tend to stick to proven ways of doing things, and feel anxious when things go wrong.
Research has shown time and again that the best predictor of an individual’s success is whether or not they believe they will succeed.1 Optimism and the confidence it engenders are important to achieving your goals. The downside is that research has also shown that optimists cultivate thoughts that make them feel good about themselves, while pessimists value a more truthful vision of themselves. However, a recent study2 suggests that optimists sort into two groups – realists and idealists – and that realistic optimists, who tend to choose accuracy over self-enhancement, make the best major decisions. These ‘optimistic realists’ or ‘rational optimists’ maintain an optimistic outlook but pay attention to potential obstacles and things that can go wrong along the way. As Halvorson puts it, “Realistic optimists believe they will succeed, but also believe they have to make success happen – through things like effort, careful planning, persistence, and choosing the right strategies.”
Other research which would seem to have an application to investment behaviours concerns our reaction to negative feedback, which the financial media delivers to investors in large dollops. Research by Finkelstein and Fishbach indicates that positive feedback is important to novices, because it helps them to stay optimistic in the face of challenges when they are don’t really know what they’re doing. Negative feedback makes them lose confidence. However, those with more experience are comfortable with negative feedback because it shows them what they can do to improve and become even more competent. Presumably, experience also teaches us to filter out constructive negative feedback from mere gloom and doom.
So how does one achieve the mindset of a realistic optimist? Halvorson suggests that we combine a positive attitude with an honest assessment of the challenges we face in getting to our goals. “Don’t visualize success: visualize the steps you will take in order to make success happen.”
- A discovery first made by psychologist Albert Bandura, and subsequently verified by many others.
- A study by Sophia Chou, organizational psychology researcher at National Taiwan University (results presented to American Psychological Association in Honolulu, Hawaii August, 2013)
Daryn Form is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada. The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Rates are not guaranteed and are subject to change at any time without notice.