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Tuesday, May 29, 2012

The Dangers of Optimism

The Dangers of Optimism | Psychology Today

"Beck and I proposed that manic thinking is characterized by overly positive biases in automatic thoughts and assumptions... I have advanced a model of manic thinking that stresses the escalation of maladaptive positivity characterized by greater risk taking. This is based on an exaggeration of current and future resources ("I have all the money, the sex appeal, the brilliance"), over-estimation of ability to persevere and replicate ("I can do whatever it takes to make it work"), over-estimates of the utility of gains ("I will really enjoy the wonderful things that come with this"), underestimation of the negative disutility of costs ("The costs won't be that painful"), discounting of costs ("There won't be any costs"), over-emphasis of the value and predictability of current information ("I know what's going to happen"), and the perception of the urgency to obtain gains ("I need it now and I can get it now").

I refer to this as an investment model or portfolio theory model of mania, suggesting that manics have overly optimistic models of decision making...

Regret is an expensive but often necessary way to learn. He who doesn't regret is--well, an idiot.

In a sense, the most useful approach may be a cybernetic model of self-regulation that keeps one from becoming too positive or too negative...

Indeed, this has relevance to investment strategies in the real economy where overly optimistic investors or buyers believed that everything would continue to rise in value, that they had the genius to predict, and that "this time it's different". It wasn't--and the bubble burst--worldwide. This is an example of where negative thoughts would have been quite helpful. But no one would listen, except the few geniuses who bet against optimism and took all the money off the table.

Indeed, we can see the consequence of the lack of negative thinking in the headlines today: The European Union needs to bail out manic populations who thought that the bill collector would never appear at their doorstep. The same with subprime mortgages and absurd derivatives which sent Bear Stearns under, destroyed Lehman, and almost evaporated Goldman, Citi and many others. What we really needed were some voices that said, "Wait, you haven't looked at the downside yet!" All the manic positive thinkers were enjoying the party."
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