OPTIMISM, PART I. . .

‘All men think all men are mortal but themselves.’ [Thanks: Edward Young, poet]  Optimists tend to believe that they are better performers, more honest and more intelligent and have a better future and are less vulnerable than the ‘average’ person.

Optimists also tend to overestimate their ability to predict the future.  Thus, they put a higher probability on desired outcomes than on undesired outcomes.  For example, optimists are over-optimistic about the outcome of planned actions.  Optimism is good.  I have friends who are optimists.  However, when it comes to crucial decisions, realism is more helpful.

Consider that as human beings we tend to over-estimate our abilities and future prospects when we are knowledgeable – when we are an expert.  We also over-estimate when feel ‘in control’ and after we have experienced being successful.  ‘There is nothing like success to blind one of the possibility of failure.’ [Thanks: Roger Lowenstein, author]

Research shows that when we are successful (independent if by chance or not), we credit or own character or ability.  Any investor can chalk up large returns when stocks soar, as they did in 1997.  In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world.  A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond. [Thanks: Warren Buffett, who is a realist who knows a thing or two]

When we stumble the mumble we often blame external circumstances or bad luck.  On the other hand, when others are successful we tend to credit their success to luck and we also blame their failures on foolishness.  When we embrace this way of being we hinder ourselves from learning from our mistakes.  As Warren remind us, we also underestimate luck and randomness in outcomes.

I know this trap well.  As a ‘consultant’ when things go well I am tempted to take too much credit – or to accept too much credit.  When things go wrong I am tempted to look outside of myself for the ‘reasons’ (and if I ‘give in to this temptation’ I can find the culprit to be ‘out there’).

Consider the kind of toast that we will seldom hear in corporate life – for most folks, a toast like this will only get one fired.  The realist is not welcomed when toasts are called for.  Charles Munger, Warren Buffett’s partner, another realist who also knows a thing or two, share with us the toast we seldom hear (gentle reader you can translate this to situations that are, for you, ‘closer to home’).

Munger writes: …Arco was celebrating their huge triumphs of making a lot of money out of the North Slope oilfields in Alaska.  And the house counsel there was an Irishman who was very outspoken and had a fair amount of charm.  And he was highly regarded.  So he could get by with talking frankly.  And the whole group was toasting one another: “Aren’t we great people for having done this great thing?” and this Irish house counsel raised his glass and said “Well, I’d like to toast the man who really caused our triumph.”  He said, “Here’s to King Faisal…Every calculation we made was off by 200%.  All the costs were way higher and the difficulties way greater than we ever conceived.  All the predictions we made went totally asinine and wouldn’t have worked with the oil prices we projected.  But along came King Faisal and the oil cartel and raised the price of oil so high that they made us all look good.  Let’s honor the proper man here tonight.”