I am going to be very rich, very soon. Money is coming in from the Ivory Coast. Apparently, I'm related to a prince over there, and he needs me to help him park a boatload of cash in America. My cut is $4 million. I would have to wire him a $5,000 handling fee to get the money, but $5,000 for $4 million? Who wouldn't take that action?
I flunked geometry in 10th grade. You're not going to run into me at a Mensa meeting. Still, I have enough sense and skepticism never to fall for a scam like that.
Louis Gottschalk was someone you might have seen at a Mensa meeting. Gottschalk, who died in 2008, was a renowned neuroscientist and professor at the University of California at Irvine. Late in life, according to news reports, he lost millions in your basic Nigerian Internet scam.
Behavioural economists would surely attribute Gottschalk's lapse to what they call the "positivity delusion."
"We're far more inclined to embrace positive information about our own investments than negative information. We often turn that off," says Tali Sharot, author of The Optimism Bias: A Tour of Our Irrationally Positive Brain.
What if the "power of positive thinking" is simply a numbing drumbeat that reinforces the positivity delusion, leading us to make blockheaded business and investment decisions?
"You have to at least entertain the possibility that the rustling in the grass could turn out to be a lion and eat you up," says Barbara Ehrenreich, author of Bright-Sided: How the Relentless Promotion of Positive Thinking Is Undermining America.
She blames much of the subprime mortgage mess and resulting financial meltdown in 2008 on this "delusionary" positive thinking.
For instance, she recounts how Michael Gelband, the onetime head of the real estate division at Lehman Brothers, saw a real estate bubble as early as 2006 and warned CEO Richard Fuld that the company should rethink its business model. This moment of realism and candor got Gelband fired.
"Brokers and buyers were all whipped up, any realistic thoughts were deemed negative and not worthy, so they fired people like him," Ehrenreich says.
Lehman filed for bankruptcy protection in 2008. Its collapse helped spark a financial crisis that spread across the globe.
The positivity delusion isn't restricted to institutional corporate types. It infects individual traders as well. I found out the hard way.
"Averaging down" on a stock can be one of the more delusional methods of investing. It means buying a stock when its price dips with the hope that it will rise back to its highest point.
During the Internet stock craze in the late '90s, I bought about 8,000 shares of PSInet, a local Internet service provider, for about $6 a share. By March 2000, it had run up to more than $100 a share (split-adjusted). I lived high, borrowed against it, got a Mercedes. Then the share price started dropping and my positivity delusion kicked in full throttle. I averaged down when it dropped to $40, then $22, then again at $6. I stopped averaging down about the same time I dumped the Mercedes and dusted off my old Yugo. PSInet went bankrupt; I came close.
"Averaging down makes little sense," says Dan Solin, author of the immodestly titled The Smartest Retirement Book You'll Ever Read. "It's one of these myths that investors are fed in the financial media. The market is telling you the stock is losing value."
Also, beware of "experts" conveying their biases on an unsuspecting public. Let's say a broker bought a large position in Company X at $20 per share. But it's recently dropped to $15. So he goes on CNBC or some financial show and says it's a real buy at $15. Well, a charitable reading is that he might be brimming with positivity bias and really wants to convey that to the viewer. Or maybe he's pumping the stock, hoping enough viewers will buy to push the price back to $20 so the broker can get out without a loss. Either way, it's probably a good idea to switch to the Weather Channel.
"We look upon too much positive exposure on CNBC or other media as a contrarian indicator," says Nicholas Haffenreffer, a portfolio manager with Torray Investments in Bethesda. "It gets us a bit nervous if people on TV are talking a lot about one of our positions."
A hot market and the positivity delusions it generates make his job a lot tougher.
"Clients often ignore risk in a rising market," he says. "They forget the rules: that cycles happen. Markets do drop, so you have to hedge. People just don't want to hear that."
Despite the downside, isn't the positivity bias a catalyst for our individual genius? Without that hope, that optimism, would Thomas Edison have invented the light bulb? Would Steve Jobs have built a single gadget? Would Ron Popeil have developed spray hair in a can?
"Positivity enhances our ability to create and explore," says Sharot, who also teaches at Harvard. "It's how things get done. We need it. It's part of our evolution."
Optimism is firmly rooted in American culture. The spiritual father of the positive thinking movement was a 19th-century spiritualist, teacher and healer by the name of Phineas Quimby. Quimby rebelled against old-style Calvinism, thinking its austere nature depressed people and caused "disease-inducing guilt." He disregarded conventional medicines and instead relied on positive thought to heal the body and foster a clear mind.
A contemporary equivalent of Quimby might be the ever-cheerful pastor Joel Osteen. He preaches the power of positive thinking and the prosperity gospel - "God wants you to be rich" - from a megachurch in Houston. Osteen commutes there from a $10 million mansion. Positive thinking has served him well.
Despite that, old-style American Calvinism, while not a load of laughs, has a lot to do with American wealth and development.
So what is the remedy? Sharot says that since we are inclined to ignore negative information about our investment and embrace positive information, we have to create some distance from the investment.
"If you are going to make an investment in something, imagine that it's your neighbour making the investment, not yourself, and then when you evaluate it you're likely to be much more objective," she says.
It's generally a good idea to stay away from any situation that you know you could not sustain long-term, says Justin Sydnor, a behaviour economist at the University of Wisconsin.
"You have to ask yourself, what are you going to do in the future that's going to change what you did in the past?" he says. "Otherwise you are just falsely believing things will get better in the future."
And get out from under the ether of a smooth sales pitch.
"When a policeman stops you and asks for your licence, he checks the licence and registration - he won't take your word for it. If you are investing, you have to do the same thing," says Lori Schock, head of investor education at the Securities and Exchange Commission.
Ehrenreich says the answers are pretty simple. "Work hard. Be realistic. Don't fall for simple pitches that cloud your thinking - don't let all these motivational speakers and self-help coaches block out warning signs that something bad might be on the horizon," she says. "Things aren't going to get better just by wishing for it."
Bob Carden is a documentary filmmaker based in Washington.
- Washington Post