As most long-time readers would guess, I don’t have much truck with the concepts of positivity. The appropriate and mindful attitude of most investors should be a constant expectation of something going wrong, because our mindless reptilian brains will automatically gravitate to the sunny upsides of over-optimism given the slightest reason.
Generally the advocates of positive thinking are in the ascendency – they tell people something they want to hear, namely that you can have what you want merely by wishing for it. This is the magical law of attraction and not only can it impoverish investors directly it also does so indirectly, through its effects on managers and employees. Exercised as mind-control it’s repellent, unnatural and destructive. Get real, folks.
Reading Barbara Ehrenreich’s book is a mind-numbing experience. Not because it’s bad; quite the opposite, it’s extraordinarily good. It’s just profoundly depressing that so many people are caught in the embrace of an idea with about the same scientific justification as astrology. Worse, many of these people are the leaders of our corporations.
Frankly it’s hard to find anything positive to say about positivity. There are, perhaps, some health benefits in terms of less stress and worry, but it's virtually impossible to pull out the genuine positives from the mass of confusing and subjective research in the area of positive psychology. As Smile or Die outlines, many nuanced studies are spun into celebrations of positivity in the hands of mainstream press: happiness sells, it seems.
Worse still, in the corporate world the lore of positivity has been adopted primarily as a means of mind-control – how many people have been forced into some infantile and fatuous role-playing and team-building sessions in lieu of job security and proper benefits? The demand that people stop whinging about their misfortunes and exhibit the correct attitude is as much about organizations maintaining control of their increasingly right-sized and temporary staff as it is about any genuine improvements in performance.
Despite decreasing job security and falling average incomes (as emphasised in the Federal Reserve's recent consumer finance study), and just about the lowest level of government spending on healthcare and social security in the developed world, social unrest is relatively rare in America – which is perhaps unsurprising when people are furiously indoctrinated with a spiel of positivity that tells them that their problems are of their own making and the solutions are in their own head, if they only want them hard enough. As Ehrenreich states:
“The strong belief in opportunity and upward mobility is the explanation that is often given for Americans’ high tolerance for inequality: the majority of Americans surveyed believe that they will be above mean income in the future (even though that is a mathematical impossibility)”
Born Poor, Die Poor
Unfortunately America has one of the worst records for social mobility: if you’re born poor you’ll likely stay poor, if you’re born into wealth you’ll probably keep it. There are copious amounts of research on this subject but, for example, American Exceptionalism In a New Light, gives a flavour (and remember that the UK, famously, has one of the most ossified class systems in the world):
“Mobility is lower in the U.S. than in the U.K., where it is lower again compared to the Nordic countries. Persistence is greatest in the tails of the distributions and tends to be particularly high in the upper tails: though in the U.S. this is reversed with a particularly high likelihood that sons of the poorest fathers will remain in the lowest earnings quintile... The U.S. also differs from the Nordic countries in its very low likelihood that sons of the highest earners will show downward ’longdistance’ mobility into the lowest earnings quintile.”
And no amount of positive thinking is likely to do much about this. Yet the whole, monstrous philosophy, is based a bizarre, pseudo-scientific idea known as the law of attraction which, to lay it bare, says that if you really, really wish for something you can have it. Want a new house? Then that low starter interest rate mortgage is just the ticket – after all, you’ll definitely be making more money by the time interest rates go up. Just believe in yourself.
This is magical thinking, not the behavior of rational individuals making coherent decisions on a long-term basis. It even has a really ugly downside, since it holds that if something bad happens to you, it’s your fault. Even getting fired. Or, unbelievably, as Ehrenreich describes from personal experience, getting cancer.
Yet the gurus of positivity have a hold on the leaders of our major corporations, offering personalised coaching services to help ensure that these cosseted, highly remunerated and increasingly remote managers have the reassurance that their wishes will translate into the actions they believe. Of course, for CEOs magical thinking often works anyway – they only have to wish for something for some minion to go scurrying off to make it happen.
The problem with this is that the more managers believe that they can control the world around them the less in control they really are. Advocates of positivity demand that those around them exhibit the correct attitude – not for no reason were the quizzical jeremiahs of the risk departments of various large financial institutions fired when they started questioning whether their leaders actually understood what they were doing. The self-same leaders are still struggling to understand why the world isn’t continuing to obey their wishes – ‘cos they’re still thinking right, aren’t they?
Positivity isn’t a neutral thing; it leads to negative outcomes for firms, employees and shareholders. It also leads to intense short-termism. A consumer believing in the law of attraction may well “reward” themselves with the latest designer goods, ignoring the fact that the credit card has to be paid later. A manager adopting the same attitude will fire people with scarce skills and cut R&D in order to boost short-term earnings, share prices and, not inconsequentially, their bonuses. Positivity is about the here, and the now; the future is another country.
Of course, positivity is actually a parasitic attachment to several of our most dangerous and cherished behavioral biases; in particular over-optimism and hindsight bias. It’s unsurprising that people cleave to a philosophy that exploits these biases, and the law of attraction is simply feeding a desire that already exists.
Quite clearly an adherence to positivity is likely to be exceedingly damaging for any investor; mostly we don’t need external justification in order to demonstrate an over-enthusiastic belief in our magical abilities to predict the future. By and large, over long periods of time, stockmarkets tend to go up. In general the positive years outnumber the negative by a factor of about two to one, although the volatility that can be exhibited in the meantime can be excessive: markets have a normal, inflation adjusted return of around 8% over long periods, but each individual year will be more than 10% greater or less than that two thirds of the time.
Broadly speaking the proper attitude of mind to deal with this is watchful pessimism. If we can avoid the worst mistakes of the behaviorally compromised investor – investing in small caps with no business models but dementedly positive management or buying wildly overpriced glamour stocks because everyone else is – keep a watchful eye on the debt levels and cashflow status of our investments and avoid being shaken out of the investment tree by volatility when some short-term calamity strikes or overtrading then the upward bias in markets will generate decent returns over long periods.
Behave, Don't Believe
If, on the other hand, we believe we’re brilliant investors based on the magical thinking of the law of attraction then we will lose, and do so quite badly, as we outlined in Happy People Make Terrible Traders. We may also fail to notice that we’ve lost, because that’s what hindsight bias does to us. Positivity is positively bad for investors. Suspicion and a permanent expectation of stuff going wrong would be a better attitude of mind. Just don’t expect to find a positivity expert telling you that. It’s far easier to believe we can have what we want because we want it.
Smile or Die is a profoundly sobering book. Next time you feel confident you should read it.