Thanks to the rise of behavioural finance, funds managers are generally aware of the innate human biases which influence decisions. Whether they can adjust for them is another question. Now, with economists involved in the study and measurement of happiness, the role of optimism is being analysed at both the organisational and individual level. STEPHEN SHORE investigates how managers can harness exuberance, without letting it overtake them.
Investors, along with the rest of the population, tend to be optimistic. After all, without a belief that things are likely to turn out good rather than bad, it doesn’t make much sense to enter the market – or to do anything for that matter. Optimism is a rational, healthy response to living in a world full of uncertainty. It has evolutionary advantages – for example, being more persistent in the face of adversity increases the chance of survival – and psychological studies have shown that optimistic people tend to be healthier, happier, and more resilient when bad things happen. Moreover, organisations are prone to cultivate optimism. Optimistic people are more likely to be hired, to generate enthusiasm, and to be motivated.
An optimistic attitude can even become a self-fulfilling prophecy. As Vince Lombardi, the legendary American football coach, famously said: “Winners never quit, and quitters never win.” Optimism untempered, however, can deviate from reality to the point of delusion. There are many situations – such as in funds management – where a realistic forecast will add infinitely more value than a belief that things will turn out for the best. Ignoring contrary evidence, overconfidence in one’s ability and the illusion of control can result in people being stubborn to the point of ruining a business. As E.L. Kersten, academic and founder of Despair Inc, a company which satirises corporate motivational attempts, not so famously said: “Quitters never win and winners never quit, but those who never win AND never quit are idiots.”
While optimism may not be something that people would want to eradicate from their organisation, some managers are taking active steps to limit its negative effects. With the growing popularity of the study of happiness, or wellbeing, and more scientific analysis of its part in economic as well as personal terms, it can now be shown that a pessimistic view of the future is likely to be closer to reality than an optimistic view. That is, if you take a pessimist and an optimist and get them to predict something measurable, the optimist will overshoot and the pessimist will undershoot. However, the pessimist will be closer to the mark. Should funds managers therefore hire more pessimistic analysts? Absolutely. Should they hire only pessimistic analysts? Absolutely not.