Is there an appetite for optimism?

16th February 2012

The most recent survey evidence has suggested that the economy hit rock bottom at the end of 2011, after all – so could we possibly be on the up?

Is there an economic upswing?

There is talk that the American economy is on the mend. Meanwhile, the Bank of England is steadily providing its rounds of support through quantative easing, and there is also the impact of falling inflation easing purse-strings. Even so, there's no doubt there's still plenty of dismal news with the eurozone constantly hitting the news and more downgrades.

Yet despite this, reports say that Mervyn King has got his mojo back, and is on an optimistic streak. "When he wasn't cracking jokes, he was hitting back at his critics and claiming bullishly that Britain was light years ahead of the rest of the developed world in dealing with its problems," reports the Daily Telegraph.

For some months now economists and traders have behaved for some months as if the world is coming to an end, but that is not the message delivered by Britain's listed companies. As Anthony Hilton says in the Evening Standard, in the past 12 months, they have paid out a record level of dividends. Given that dividends are derived from profits, does this not suggest the business world is, in fact, on the up?

Why it helps to be optimistic

The Reformed Broker Joshua Brown argues the case for investor optimism on his blog.

He says of the ‘glass-half empty' crowd: "What makes these people so dangerous is that they are absolutely right on the details but dead-ass wrong on the consequences.  And they have no context.  They don't understand that throughout history s**t has always been f**ked up and yet people find a way to get things done and move forward.  It will be no different now, but the haters have so many statistics handy to keep you out of the game, under the bleachers with them and the rest of the cowards.

"…I have no idea when this secular bear market and the attendant economic malaise will truly be over – but I know for a fact that if you're not planning for its end you're going to miss your chance. You'll be flatfooted for the pivot, too close-minded for the turn, too fat for the sprint that begins when those Animal Spirits take hold."

However, there is a danger in being overly optimistic – as economist James Altucher discovered when he made a TV appearance and said he was bullish about the economy for 2012. He received a death threat.

He concludes on his blog:

"I'm very bullish. You can stop reading here if this makes you irrationally angry for some reason."

But even so, is there a case for pessimism?

There is a case for pessimism in current conditions. Yet reports on the level of confidence among consumers and investors are everywhere, with cries for optimism to push the economy forwards.

Daniel Kahneman, a psychologist and Nobel economics laureate, has a chapter in his book "Thinking Fast and Slow" which describes overconfidence as "the engine of capitalism". Certainly a blindness to the odds of success is necessary for entrepreneurs – the drivers of future economic success.

According to Mr Kahneman, the chances of an American small business surviving for five years are just 35%. But ask individual entrepreneurs about their prospects and 81% think they have a better than seven-in-ten chance of success.

However, The Economist adds: "Anyone who has driven past a row of empty houses in the Irish countryside will realise that optimism can lead to wasteful investment. And Mr Kahneman cites studies that show how overoptimistic chief executives (as measured by the amount of stock they own) were more likely to gear up their balance-sheets and pay too much for acquisitions."

The danger of optimism was illustrated when the difficulties kicked off back in 2008. "The men who reached the top of such risk-taking organisations had, by definition, been successful in their previous bets. They believed this was due to skill, not luck, making them too sanguine about their ability to ride out the crisis."

But there's no denying – people want good news

Kim Stephenson, Mindful Money's psychologist blogger, says: "There's been depression and pessimism for a long while. People want some good news. But while they will rationalise whatever view they express, they are actually optimistic or pessimistic depending on the prevailing mood and their interpretation of reality, not on reality itself . They'll have post hoc justifications for optimism (or any other feeling) but they are nothing to do with reality, simply rationalisations for what they feel.  

"The problem Mr. King has is that, in common with most public "experts", he's been repeatedly shown to be deeply flawed as an expert, and is not trusted. Most of the Government, their advisors and colleagues (like Mr. King) have become boys who cried wolf. They've repeatedly said they see light at the end of the tunnel and it has turned out to be the train on fire. There might be cause for optimism now, but nobody is going t
o believe Mr. King that it has arrived and in any case, nobody is going to be optimistic for logical reasons anyway. Optimism is a feeling. It's like having "faith in the future", faith is held despite, not because of, the facts, that's what makes it faith. 

"You can't "create" optimism among a mass of people – at least, not if you have no credibility and I don't know of anybody in the public arena who has enough credibility on finance to sway the emotional atmosphere.  So the "feeling" is going to stay where it is, until it changes spontaneously or somebody who has some apparent credibility can inspire sufficient people with the faith to believe things are changing.  And like all faith issues, it isn't a case of "you'll believe it when you see it", with optimism, you'll see it when you believe it."

Perhaps the best response is a touch of cautious optimism.


More from Mindful Money:

Mervyn King optimistic over UK economy

Could changing sentiment see a market surge?

The UK is no longer in the Premier League

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