If fatalistic thinking is the dangerous extreme of negativity, greed is the dangerous extreme of optimism.
I’ve said over and over, we wished and hoped our way into this financial mess and many are trying to wish and hope their way out.
In many respects this article by Knowledge@Wharton hit it on the head:
“I think we agree that over-optimism is perhaps a lot of what got us into this mess,” said Wharton business and public policy professor Jeremy Tobacman, a panel participant. “There was rampant over-optimism about housing prices.”
Tobacman pointed to a survey by Case and Shiller in 2003 of homeowner attitudes in four major markets — Boston, Milwaukee, Los Angeles and San Francisco. In all four markets, more than 80% of homeowners surveyed said they believed home prices would rise over the next few years. When homeowners were asked how much they expected the price to change in the next months, mean responses ranged from 7.2% in Boston to 10.5% in Los Angeles.
“Even more astonishing than these one-year numbers are the numbers for decades,” Tobacman noted. When faced with the question, “On average over the next 10 years, how much do you expect the value of your property to change each year?” homeowners in Milwaukee said they expected prices to rise by 11.7%. Homeowners in San Francisco said they expected a 15.7% return.
People often make poor economic choices because they are overly optimistic about what they will do in the future, Tobacman said. For example, people transfer credit card balances over to cards with high long-term interest rates because they believe they will pay everything off before the much lower teaser rate expires. (Most don’t.) Borrowers who default on payday loans typically pay interest amounting to 90% of the loan’s principal before they finally give up and stop making payments.
One study of a health club found that members who worked out on average just four times a month chose to pay a monthly membership fee of $85, even though the gym also offered a pay-as-you-go rate of $10 per visit. “When people are polled about their beliefs [as to] what they’re going to do, there is a radical refusal to accept reality,” said Tobacman. “Myopia may be willful in that we don’t want to contemplate undesired outcomes.”
In the recent bubble, both buyers and lenders were overly optimistic about what the future would bring. Buyers ignored the possibility that they might not be able to keep up on payments because they assumed the prices of homes would go up and they would be able to sell or refinance. Likewise, lenders ignored the possibility of default because rising home prices had made it easy to get bad loans off the books. Tobacman shared a quote from John Kenneth Galbraith’s The Great Crash, a history of the events leading up to the Great Depression: “The bankers were also a source of encouragement to those who wished to believe in the permanence of the boom. A great many of them abandoned their historic role as the guardians of the nation’s fiscal pessimism and enjoyed a brief respite of optimism.”
Said Tobacman: “I think the question is, when exactly does this powerful impetus to believe in a rosy future get disciplined by the market and when does it get out of hand?”
Of course the reverse is also true. If people feel that this recession will never end, that they are doomed (Fatalistic thinking, not negative!) then yes, we are in fact going to be stuck. People will not buy, commerce will come to a screeching halt and our economy will collapse.
That is why balance is always the key. You have to have both negative thinking and positive attitudes in life.
Be positive. Think negative!
