Why Does Pessimism Sound So Smart? (Especially When Things Are So Good.)

By Tom Gardner and Morgan Housel

"For reasons I have never understood, people like to hear that the world is going to hell," historian Deirdre N. McCloskey told the New York Times this week.

It's hard to argue. 

Despite the record of things getting better for most people most of the time, pessimism isn't just more common than optimism, it also sounds smarter. The pessimist is intellectually captivating, garnering far more attention than the optimist, who is often viewed as a naive sucker.

It's always been this way. John Stuart Mill wrote 150 years ago: "I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage." Matt Ridley wrote in his book The Rational Optimist:

If you say the world has been getting better you may get away with being called naïve and insensitive. If you say the world is going to go on getting better, you are considered embarrassingly mad. If, on the other hand, you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize.

In investing, a bull sounds like a reckless cheerleader, while a bear sounds like a sharp mind who has dug past the headlines – despite the record of the S&P 500 rising 18,000-fold over the last century. Yes, 18,000 times over! Wharton Professor Jeremy Siegel is often chided as a perma-stock-bull, blindly cheering for a higher market every time he goes on TV. But he's done it since the early 1980s, a period in which the market increased in value 40 times over. 

And so, we delight in movies like The Big Short and carp about the collapse of Enron. And that’s great. They're extremely instructive. But we make a mistake by over-emphasizing them. . . rather than obsessing over medical breakthroughs, the enduring success of companies like Starbucks or Amazon.com, the exciting prospects for self-driving cars, et cetera.

This problem goes beyond investing. 

Harvard professor Teresa Amabile shows that those publishing negative book reviews are seen as smarter and more competent than those giving positive reviews of the same book. "Only pessimism sounds profound. Optimism sounds superficial," she wrote.

Why?

There's clearly more at stake with pessimism. Daniel Kahneman won the Nobel Prize for showing that people respond more strongly to loss than gain. It's an evolutionary shield: "Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce," Kahneman once wrote.

Here are two other reasons that pessimism gets so much attention.

1. Optimism appears oblivious to risks, so by default pessimism looks more intelligent. But that's a wrong way to view optimists. Most optimists will tell you things will get ugly, that we will have recessions, bear markets, wars, panics, and pandemics. But they remain optimistic because they know that, like the universe, healthy markets grow. To the pessimist a bad event is the end of the story. To the optimist it's a slow chapter in an otherwise excellent book. 

2. Pessimism requires action, whereas optimism means staying the course. Pessimism is "SELL, GET OUT, RUN," which grabs your attention because it's an action you need to take right now. Optimism is mostly, "Don't worry, stay the course, we'll be alright," which is easy to ignore since it doesn't require doing anything. Remember, it is enduring optimism that has earned a return of 18,000X over the last century. The opposite approach has failed, terribly.

Should you ever listen to pessimists? Of course. They're the best indication of what's unsustainable, and thus the catalyst for what must change. They lay down the breadcrumbs on pathways for entrepreneurs to run their innovative minds (think, Elon Musk and Tesla).

For long-term investors, though, an optimistic view that humanity will profitably solve the world’s greatest problems is the right frame of mind.