Fallacy Number 3 - Pessimism

Two notes before we dive in this week. 

1- Originally I was going to talk about “needed” car payments/lease as a common financial fallacy too many people fall into thinking is required in life. This is still a valid point and maybe something I dive deeper into at some point, but I pivoted this week. 

2- There is very little chance I’m going to be able to curate this down to my typical 250 word count, so I’m taking the limitations off. 

Wrapping up this series on financial fallacies, I want to point to a timely one: pessimism. 

It seems to be all around us this whole year, but perhaps even more pronounced the past few weeks. Its seemingly omnipresent shadow threatens to etch itself permanently into the landscape of our lives. 

I’ll focus on a micro-view here in a bit, but first a few thoughts on the macro concept of pessimism. 

Pessimism sounds smart. It’s extremely seductive (Morgan Housel wrote a fantastic piece on this back in 2017). Pessimism isn’t just more common than optimism - it just sounds more intelligent and is intellectually captivating. Beyond intellect, it also latches onto our emotions more than optimism can ever hope to. It’s easier to create a pessimistic narrative because the stories involved are oftentimes fresher and more recent, when optimistic narratives require looking at longer and more boring stretches of history. 

As Housel writes - 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… Say we’ll have a big recession and newspapers will call you. Say we’re headed for average growth and no one particularly cares. 

Daniel Kahneman wrote about how this hyper-attention to bad news has an evolutionary origin. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce. 

It’s in our DNA. 

Housel offers 3 reasons why pessimism is so popular when it comes to finances.

1. Money is ubiquitous and impacts all of us.

2. Pessimists often extrapolate trends without accounting for adaptation.

3. The third, and most powerful I believe, is that progress happens too slowly to notice while setbacks happen too quickly to forget. 

Zooming back into the micro and recent topics, specifically the recent elections, I’m going to be candid and share some personal thoughts and experiences. 

I’ve been a registered Independent for most of my life since I first registered to vote in high school. I’d classify myself somewhere in the middle leaning right when factoring in all things political. If I were forced to choose a party I most closely identify with, it’s probably the Libertarian party. I don’t have a “dog” in these two-party election fights. 

While the middle can be a lonely place to dwell within, it also provides me the ability to see both sides - and I have friends who are in positions much stronger to the left and to the right than I am. 

Currently about half of them - or those in their camp - are scared. They’re pessimistic. They think the economy and the stock market are both on the precipice of permanent failure and can’t fathom an alternative rational worldview. 

Four years ago, the other half - or those in their camp - were scared. They were pessimistic. They thought the economy and the stock market were both on the precipice of permanent failure and couldn't fathom an alternative rational worldview. 

Eight years ago… 12 years ago… a pattern is emerging. 

Look, I’ll be the first to say that I don’t know what is going to happen in the economy nor the stock market in the short term. I’ve written recently on how presidents just don’t matter that much to the stock market returns. 

My point this week, however, isn’t political - it’s to state that pessimism is too common of a financial fallacy and peril that people fall into. There is always a reason to be pessimistic - always. I call them apocalypse-du-jours. 

A lot of people right now are pessimistic because of the election outcome. Are there things to be concerned about in our country? Sure - there always are, and always will be. But stock market performance pessimism shouldn't be one of them. We simply just don’t know. 

Invesco put out a great piece earlier this year. My favorite slide is below. It shows “partisan portfolios” that were only invested in the Dow Jones when their preferred party was in office. The chart speaks for itself. 

Interesting Resources

Morgan Housel
"The illusion of control is more persuasive than the reality of uncertainty."

2020 Proves We Don't Need More Information
6 min read | The Gospel Coalition
Super grateful for Fident Friday reader JM sending me this. In it, the author makes the case for an information disaster in our current age. There is too much, too fast, and too fragmented. The irony of the information age is that the more information we get, the less wise we seem to become. Our brains can't handle it all and end up working in triage work instead of deeper, evaluative work required for wisdom. There's also so much information out there that we can go find whatever it is that we want to confirm to our existing base of knowledge. 

And since the information is coming so fast, there's little time for vetting, fact-checking and prudence. Clickbait material reporting has spread more confusion that it has brought clarity. 

And lastly, information is too fragmented. This isn't a political statement - it's a factual statement. Algorithms are designed to show us more of what they think we should see. (Watch Netflix's Social Dilemma if you haven't yet to see an inside look at this). 

The post ultimately points to the need for a new approach ... one that is outlined in detail in the author's forthcoming book. Which although I wanted to know it all right now, I do know that I'll be ordering the book as soon as it's available.
I feel somewhat dirty and in need of a shower talking so much about pessimism, especially compounded by bringing up politics. 

But it is an important topic that I feel needs addressed. Pessimism permeates so much of our lives, and it can really have a severely negative impact on our finances if we allow it. Even outside of investments - it can shrink our generosity, bloat our savings accounts, and discourage our new ventures. It can poison not just our balance sheets, but even our hearts and our relationships. It really is something we need to be diligently aware of in each of our lives. 

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