Friday, November 20, 2015

Dump that positive thinking - It hurts you



Most have been brought up on learning to be upbeat and positive. Think about positive thoughts and fantasize about success.  Monty Python has made fun of positive thinking extremes with their song "Always look on the bright side of life". No matter how bad it gets be positive.

The latest research suggests that this way of thinking actually harms you. In the book Rethinking Positive Thinking: Inside the New Science of Motivation by Gabriele Oettingen, we are told that the research calls for balance between positive thinking and the potential negatives. Quit with fantasy thinking and engage in reality which looks at both the good and bad for achieving what you want. Balance leads to more success.

The author discusses the four step technique of WOOP for balanced motivation. WOOP stands for Wish, Outcome, Obstacle, and Plan, and is a technique for providing motivation and successful thinking without the potential for extreme thinking. Too much positive thinking and you will have greater motivational problems and loses from failure.

What does this have to do with money management? There are clear issue of over-confidence with forecasts and expectations. The over-confidence leads to strong behavior biases, but it can also lead managers to be less motivated because they are less aware of pitfalls, failure, and the necessary hard work that is often required with gaining success. Wishing for success or for something good to happen to your positions and views is only going to get you into trouble.

We see the problem of overconfidence in forecasts. Just look at the adjustments in the chart below. I am not saying that a change in attitude will make you a better forecaster, but the research does say that being more realistic of what you are trying to do, including facing obstacles, will allow you to better deal with problems in general.


Be a realist, be a pragmatist, and  do not believe that willing what you want will get it. Thoughts of money management success has to be tempered with the fact that there is just a lot of hard work and failure with running money and making forecasts. 



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