Cognitive ability and miscalibrated financial expectations
journals.sagepub.com
journals.sagepub.com
* you exist today
* you have agency to affect tomorrow
Pessimism is closer to truth. But it promotes inaction.
Optimism might be wrong, but it tugs at your agency to affect the future. A future you affect is better catered to your needs than a future you don't.
Therefore, optimists who make marginal inroads to the future they desire end up more fulfilled than pessimists who accept a future they only tolerate.
For once my hn status is relevant.
> Optimist by choice, Pessimist by experience
Is there any evidence on this? (I must admit, I didn't read the paper, just the abstract.)
> Optimist by choice, Pessimist by experience
Optimism vs. pessimism in a particular situation doesn't appear to me as being a choice. Can you really choose to be an optimist or is it just ignoring/suppressing your pessimism?
I don't know if there's evidence, but I find the point interesting because the idea occurred to me independently when I read this in the paper:
> Unrealistically optimistic financial expectations [...] can lead to excessive business entries and subsequent failures, as optimists overestimate the financial returns from entrepreneurship (de Meza et al., 2019)
I thought: Do pessimists overestimate the financial returns from a regular job?
It seems in many ways to be about whether/what risks are worth taking.
I am not sure I would agree. Try living in the snowy mountains without shelter and a fireplace. I'd bet optimism wouldn't help you a lot in that particular circumstance unless you'd have already secured the necessities for survival.
I think you’d need more pessimism to anticipate risks rather than optimism to believe that you can survive. The will to survive is somewhat hardwired anyway.
Both fix a strategy before looking at the question.
Another strategy would be to look at the question at hand and what we can predict with what uncertainty about relevant variables.
Even though pessimism can minimize impact of all kind of negative future live events, it won't make you any happier if you will always be as pessimistic as you are now.
Pessimism maximizes the value of worst case scenario.
Optimism maximizes the value of the best case scenario.
From a quick read, they are essentially asking people to predict whether they'll be better/worse off next year, and then correlating that with whether they were right in the next year's financial data.
Their study period looks like it's the period immediately post-GFC (2009 to 2021). As I understand it, the economy has performed better for those in professional roles, who are likely to score well on the tests of cognitive ability, than it has for lower-skilled jobs. And of course in the middle of that period, there's the Brexit vote that was pretty uneven in terms of who thought the economy (and their circumstances) would go well or badly.
It's an interesting data set, but I don't think I'd be game to make the same "causative" conclusions that they do ("Our findings suggest that these supposed consequences of optimism bias, may be a side product of the true driver, low cognitive ability").
So for example, let's say tech starts to boom, and everyone good with tech will all of sudden have much better financial performance, although everyone were making their predictions based on historical performance.
Joking aside, this whole paper had me thinking about Candide... All is for the best!
Boy, was I wrong!
It was actually funny and entertaining to read, had a great story, too.
Sounds like they proved that smarter people are better at predicting their (financial) future, which is pretty much a tautology.
Let me suggest a rather Neitzschean answer: it's very useful in a society to have the default assumption of the populace be that their prospects are better than they actually are. That's headroom.
If you haven't read him,
Neitzsche suggests that the promise of Christian afterlife, was in effect an extreme form of this: an irrational optimism about the future, which (very usefully) made the actuality of moment to moment, day by day, awfulness bearable, on the premise that it was a transient state.
He also noted that it was useful to associate sacrifice and penury with righteousness, and described the instrumental benefit to the 1% in allowing the masses to take pleasure in the thought that those enjoying a comfortable life in this world, would meet an (per Pascal, infinitely more expensive) bill in the next.
IMO this is "hard to un-see."
It isnt hard to think of situations where this would be true.
"Nietzsche is dead." - God
"this is a pretty nice cave y'all got here" - God
"the belief in the Christian God has become unbelievable (for an educated person)" - Nietzsche (supposed that to be well educated meant ability to read Greek and Latin and have familiarity with ancient texts from several cultures giving variations of Christian origin myths.
"We have just got to decrease funding for Education" - somebody living in a cave that still believes in God.
I wouldn't apply these conclusions on other countries.
There's usually not a "pessimistic" or "optimistic" median line. It's in the middle.
I do find myself disappointed in the way humans choose to interact with each other. In my experience, those that choose vocations that reduce interaction with others tend to be more problematic.
In my case, I regularly deal with folks that "don't play well with others," by definition, and am often quite gratified in the way we get along.
I think a lot of times, people confuse education, politeness, and civility with good nature. In my experience, it has often been the opposite. Some of the best people that I've ever known, use "fuck" as standard modifier in their communications. Some of the very worst (and I have known some bad people), have been incredibly polite, erudite, and urbane.
But that's just me. I don't claim to have a "normal" life experience.
I do tend to make fairly decent long-range plans, though.
Pessimism may lead to some kinds of action, but also leads to missing out on good opportunities. Over the years, I’ve started to look at it like a poison. In the past, it has drastically reduced the possibility space available to me.
Blind optimism is not useful either, but in general, rational optimism leads to better outcomes.
Isn't "rational optimism" an oxymoron? What's the difference from "rational pessimism"?
For me, behaving "rationally" means trying to see the reality as it is, being able to weigh all the options, probabilities of outcomes, assigning (subjective) value to them and choosing from those. Where does optimism/pessimism come into play in connection to rationality?
I often get the sense, that people talk about optimism, but actually mean risk aversion. Being less risk-averse leads more often to good outcomes, but more often also to bad outcomes.
Pessimism is no more or less rational than optimism. Optimism can be rational or irrational depending on the situation. But pessimistic thinking tends to lead to miscalculations because it’s often rooted in false beliefs about what is possible, treats failure as something to avoid, and depending on the situation, keeps the person stuck where they are.
> For me, behaving "rationally" means trying to see the reality as it is, being able to weigh all the options, probabilities of outcomes, assigning (subjective) value to them and choosing from those
Pessimism or optimism tend to be layered on top of this kind of calculus.
If you’re a pessimistic person, you’re more likely to believe the probabilities of some outcomes are low, and make decisions based on that.
If you’re an optimistic person, you’re more likely to try more things, because you’ve eliminated less things.
I think a truly rational examination of a situation strikes a balance between these orientations. It takes risks seriously, but also takes chances on things that might not work.
For all of the rationality that we think we have when making these evaluations, it’s often built on a base of our personal beliefs, which are deeply colored by our tendency towards pessimism or optimism, which tends to get baked into us based on life experiences.
The book “Learned Optimism” explores the kinds of outcomes that tend to be associated with pessimism vs. optimism and is a really useful read. I was personally extremely pessimistic, and didn’t even realize how much this was changing my daily decisions until I became more self aware while reading that book.
I was born into pessimism, and I was I was using that pessimism as a tool in my professional career where it served me pretty well. Imagining how things can go wrong leads to much better code. But it was wreaking havoc on my personal life and relationships and my mental health.
Making rational, risk based decisions is possible without this pessimistic default, and doesn’t have to come with the added downside of seeing the world darkly.
Is 90/10 an optimist?
I was diagnosed with depression 15 years ago and at the time also subscribed to this pessimist = realist idea or in some ways intelligence. And there's a lot of validation on the internet for that idea "intelligent people are more depressed and pessimistic", so as a teenager I thought that this is the right way to be because I wanted to think that I am intelligent.
I think I'm very glad that I managed to escape this sort of mindset. To provide most value I believe I should look for opportunities and the ways they play out positively, while spending a limited amount of time to make sure I'm not wasting my time.
One of the things that persistent pessimism also leads to is the concept of “learned helplessness”, which could be described as a kind of pathological pessimism. A state where on top of thinking certain outcomes aren’t possible, the impulse to try moving out of our current situation never even occurs. The equivalent of drowning in 2 feet of water, because it never occurred to the person to stand up.
I’m also really grateful to have started moving away from this mindset. I wouldn’t say I’ve fully escaped, but I’m on the path. That book also provides some helpful reframing exercises that when applied consistently, start to re-wire default responses to situations. This has been transformative in my life.
I think that the 90/10 split is an interesting way to look at this, and I tend to agree. I think the degree of optimism applied probably needs to scale inversely to the calculable risk (e.g. building an airplane necessitates lower risk tolerance). But in most situations, it seems like a much better default. And ideally this is always contextual to the situation at hand.
> If you’re an optimistic person, you’re more likely to try more things, because you’ve eliminated less things.
Isn't that a manifestation of risk aversion? If you're risk-averse, you tend to play it safe. If you're not, you're eager to try risky things for the possibility of big rewards.
Both can lead to preferred outcomes, it just depends on what is the preferred outcome. For some, a middle class family life is an utter failure, for some a dream. Pessimism might be a more successful strategy for those wanting that middle class lifestyle.
The point is that pessimism directly leads to behavior that looks like risk aversion, regardless of whether or not there is actual risk to avert. Risk aversion by itself is typically associated with decisions that can be made based on actual data about risk. The pessimistic person defaults to the "risk averse" stance without even understanding the risk (regardless of whether the risk is even calculable or worthy of considering).
> Pessimism might be a more successful strategy for those wanting that middle class lifestyle.
I'm not following the logic here. Someone can be optimistic about life, and still prefer a middle class lifestyle. You can also be optimistic and risk averse.
Setting that aside, there are some interesting papers that explore this [0], and I'd strongly recommend looking at Martin Seligman's original research in the 70s about Learned Helplessness [1], which has a close connection with pessimism, or conversely, a lack of optimism.
Interestingly, optimism is a skill that can be learned/conditioned much like pessimism, which points at their function as default orientations vs. neutral tools to be applied. In other words, if you're a pessimistic person, you will make decisions based on that orientation, often without even having any awareness of the impact of your pessimistic defaults.
This is quite different from a data-driven risk averse decision.
- [0] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3807005/
- [1] https://www.penguinrandomhouse.com/books/163862/learned-opti...
I guess you could say that about "blind pessimism". I guess we can discount both "blind" optimism/pessimism as just irrational, and it doesn't make much sense to discuss those.
But I think in the case of "rational optimism", the person might reasonably evaluate the risk, even understand it's low, but still not act, because it doesn't make sense given their goals, risk aversion etc.
> I'm not following the logic here. Someone can be optimistic about life, and still prefer a middle class lifestyle. You can also be optimistic and risk averse.
Well, you defined optimism as spending 90% looking for opportunities. Now assume, that the person in question already has a middle class lifestyle, they already achieved their goal, have basically what they need to be happy. Why look for opportunities if you already have everything you wanted? Isn't it more rational to rather protect those assets you have and always desired?
So I don't think optimism (in the general sense) and risk aversion necessarily contradict each other, but specifically your definition of optimism doesn't fit with the risk aversion IMHO.
You have limited ability to consume and process information. You can't consume all information. There's billions of bits of information at any given time. It's impossible to predict the future without having some sort of simulator larger than universe. So in the end you must have some form of strategy. On which particular pieces of information are you going to focus? Are you going to try and find opportunities, or are you going to try and find risks, because you can find more than a lifetime of thoughts for both cases.
So you could also balance it out, that you spend 90% time on opportunities and 10% time on risks. It might be more successful strategy than let's say 50%/50%.
Strategy for what? One piece of the puzzle missing here is the goal, strategy only follows from that.
I understand this is hacker news, but still it sometimes feels like people here assume everyone's life goal is a multi-billion exit. A more common goal might instead be to e.g. live a peaceful life, spend a lot of time with their family and friends, etc. Such goal will have a completely different rational strategy to achieve it.
> So you could also balance it out, that you spend 90% time on opportunities and 10% time on risks.
You're equating optimism with spending time/effort on looking for opportunities, but that for me doesn't ring true. Acting on the opportunities is what IMHO is the core feature of optimism. You can have a 90/10 of time dedicated to opportunities/risks, but if you don't make the jump, you're not an optimist.
If there's a snake that's about to bite you, as an optimist you could view running away as being hopeful towards being able to run away succeeding and not getting bitten.
While pessimist might think that the snake will catch them any way.
You could of course view it as something where optimist will think that snake will not bother to bite them at all and pessimist will run away because they think it will.
As we know, risky behavior must be fine, because if people minded being dead we'd have heard some dead people complaining about it by now.
Seems like a clear net win to me.
Be pessimistic about incumbents and competition, but pessimism about incumbents will show what needs fixing ie the opportunity.
When shit happens, the optimist deals with it, ignoring it the rest of the time.
The pessimist will have to deal with it anyway but paying the price for a much longer time trying to avoid or “prepare for ” it.
Not when you're, say, racing a train at a train crossing.
I lean towards pessimism; generally expecting negative outcomes. I don't spend much time worrying about things that can't be influenced, though. It's certainly not mentally healthy in many ways, but I don't experience much stress because of it.
That can be an efficiency win through many different mechanisms.
You can also be pessimistic and optimistic at the same time in different contexts or scales. I pessimistically assume every sales pitch is something better for the salesman than for me. I optimistically think that humanity is on the whole more good than bad, and more progressing than not.
That's the nature of investment without perfect information. It's identical to insurance.
Also, the abstract covered "unrealistic optimism" but didn't scrape "unrealistic pessimism." Which, clearly can be a factor, the same way you can easily be convinced to overpay for insurance in some situations.
Which of course it does. As a lot of crypto investors who lost everything will tell you.
Even more important is something like climate change. Low-cognitive optimists are far more likely to say "It'll be fine" than the high-cognitive scientists who are running around screaming with their hair on fire metaphorically, before everyone's hair starts burning literally.
Brexit was another example.
>"You can avoid reality, but you cannot avoid the consequences of avoiding reality." —Ayn Rand
Well that just about sums up the Libertarian mindset and its unintended, unavoidable consequences, doesn't it?
In conjunction with the conclusions of the paper, it's not very flattering to Ayn Rand's or her followers' cognitive abilities.
I thought the quote was insightful:
You can avoid reality, but you cannot avoid the consequences of avoiding reality. —Ayn Rand
So I ask, in my writing, What is real? Because unceasingly we are bombarded with pseudo-realities manufactured by very sophisticated people using very sophisticated electronic mechanisms. I do not distrust their motives; I distrust their power. They have a lot of it. And it is an astonishing power: that of creating whole universes, universes of the mind. I ought to know. I do the same thing. It is my job to create universes, as the basis of one novel after another. And I have to build them in such a way that they do not fall apart two days later. Or at least that is what my editors hope. However, I will reveal a secret to you: I like to build universes which do fall apart. I like to see them come unglued, and I like to see how the characters in the novels cope with this problem. I have a secret love of chaos.
Of course, I'm unsure whether Ayn Rand is a shining example of rational thinking either!
https://www.scifiblog.org/2023/03/philip-k-dicks-intriguing-...
https://news.ycombinator.com/item?id=38541723
Wow, talk about an ironic quote:
>"You can avoid reality, but you cannot avoid the consequences of avoiding reality." —Ayn Rand
Well that just about sums up the Libertarian mindset and its unintended, unavoidable consequences, doesn't it?
In conjunction with the conclusions of the paper, it's not very flattering to Ayn Rand's or her followers' cognitive abilities.
Realism and pessimism being synonymous now. Perhaps this was written by an optimist.
I'm not convinced this means pessimists are smarter. Maybe it just means that smarter people are more likely to surprise themselves by how well they perform. If someone expects great outcomes, it doesn't make them pessimists if they do even better than that. Oxford's first definition of "pessimist" is "a person who tends to see the worst aspect of things or believe that the worst will happen," which is not at all what the study looks at.
You should read "All else being equal, those highest on cognitive ability experience a 22% (53.2%) increase in the probability of realism (pessimism)" as as a 22% increase in realism and a 53.2% increase in pessimism
She read the sentence including “…and the data crystallized to show..” and she couldn’t finish he was almost in the floor.
“DATA DOESN’T CRYSTALIZE! Ahahaha crystals crystalize!”