STREET DOGS

Daniel Kahneman says he doesn’t invest in stocks because he feels he is genetically wired to be pessimistic.

In his book, The Undoing Project: A Friendship That Changed Our Minds, Michael Lewis reveals that while Kahneman is a pessimist, Amos Tversky was not merely an optimist; he had willed himself to be optimistic, because he had decided pessimism “was stupid”.

So, here we have two brilliant psychologists who have done path-breaking work in the field of behavioural sciences. One seems to accept he is hard-wired to be pessimistic. The other makes a choice to be optimistic. This begs the question: is there a choice?

Common thinking has most believing that people are naturally born pessimists or optimists. But according to scientists who have examined explanatory style — how you explain the events in your life — there’s hope for pessimists. Pessimists tend to believe that negative events are their fault.

Optimists believe it’s a matter of circumstance. Someone with a pessimistic explanatory style trying to make sense of some bad news might say, “I failed. And I fail at everything.” One with an optimistic style might look at the same and say: “This other thing made me fail. And it won’t last.” By changing their explanations, flipping their style, pessimists can apparently change their outlook and become more optimistic.

The other question, of course, is whether Kahneman would make a better investor as an optimist. Research suggests optimists tend to outperform pessimists. But pessimism has its benefits too, for example when it prevents you from happily jumping into a risky investment.

In his book, Learned Optimism, Martin Seligman says the guideline for not deploying optimism is to ask what the cost of failure is in the particular situation. If the cost of failure is high, optimism is the wrong strategy.