Optimism is the key to a prosperous new year

In his great treatise on the wealth and poverty of nations throughout history, David Landes, Emeritus Professor of Economic History in Harvard, highlighted two key determinants of economic success. One was the attitude a society takes towards science and technology. The other was the importance of a society's attitudes, beliefs and behaviours for economic performance. He singled out one in particular as critical to success - optimism.

Never was optimism so important as it is now. The US economy and all the economies that depend heavily upon it are confronting two serious challenges - the economic contraction that was sparked back in April 2000 when the frenzied speculation in internet and technology stocks finally came to an end and the terrorist attacks of September 11th.

Nobody can be sure if the after-effects of these two seismic shocks will interact and reinforce one another and catapult the US economy into a long and deep recession. As if that were not enough, our own Central Bank last week gloomily outlined another possible "scenario" - the prospect of an increase in the value of the euro against the pound and the dollar, possibly precipitating a crisis in our competitiveness.

Already, in Ireland, 17,000 people have lost their jobs in the hi-tech multinationals over the past year. For the first time in their working lives, a cohort of high-earning, young Irish people will confront the possibility that their income may drop, or disappear altogether, that they will be unable to keep up their mortgage repayments.

Facing into an uncertain year, with talk of downturns, slowdowns and even recession, the very complexity and obscurity of economic cycles are themselves oppressive facts. Some of the variables that decide our future - like GDP, fiscal policies, stimulus packages and the level of the stock market - are as remote, incomprehensible and uncontrollable to most of us as the minds of the gods must have seemed to our ancestors. In their efforts to predict the future, it is not uncommon for heavyweight economic forecasting businesses to use more than 600 economic variables in their computer models of the economy.

But despite the mathematical complexity of their models, economic forecasters have a distinctly unimpressive record. Why? Because, at base, the models are trying to make predictions about how people will behave, about psychological confidence. Confidence is what drives the economy.

Economic cycles, boom or recession, once they get going, tend to develop a life of their own, a self-sustaining, self-reinforcing momentum. As in individual psychology, negative thinking, once it takes hold in a business or in an economy, can rapidly feed on itself, closing off options, undermining action and become a self-fulfilling prophesy.

John Maynard Keynes believed that great waves of optimism and pessimism are what drive major economic fluctuations. He went so far as to say that the rational knowledge basis for major economic investment decisions "amounts to little and sometimes nothing". Given the extreme precariousness of such a knowledge base, he argued that decisions "can only be taken as a result of animal spirits - of a spontaneous urge to action rather than inaction". But, he warned: "If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die, though fears of loss may have a basis no more reasonable then hopes of profit had before".

As we face into the post September 11th world, the management of uncertainty - economic and psychological - will be a key issue for the Irish economy, for individual survival and success, and, indeed, for the outcome in the forthcoming general election. Contrary to the received wisdom, that in times of economic uncertainty, people will seek out those who will make them feel secure, I believe that what Irish society now needs and wants is somebody to make them feel optimistic.

Back in the mid seventies, when I was a student there, Robert Lucas, the University of Chicago Nobel prize-winning economist, famously pointed out that what people did in the past is no longer a reliable guide to how they will behave in the future. When circumstances change, people's behaviour changes too. For example, given our economic, cultural and religious history, who could have predicted the unabashed relish with which the Irish embraced prosperity and the good life? They will not lightly let it go and will look for leaders who will sustain their confidence.

Optimism is crucial for leadership, particularly in a period of change and uncertainty. A recent review of the many hundreds of studies on leadership identified five essential characteristics of effective leaders. One was the ability of a leader to make people feel optimistic about their personal contribution to the change process, and their ability to overcome challenges and devise good solutions.

If you are still doubtful about the value of optimism, here are four reasons to be optimistic:

1. The meaning of things lies not in things themselves, but in our attitude to them. Antoine de Saint-Exupery's observation has a sound empirical basis in psychological research. Personal, business and political effectiveness is more influenced by how individuals "read" their situation and their capability to respond to it than it is by objective, actual reality. And optimism is a key determinant of how individuals "read" their situation. People with an optimistic attitude have a strong expectation that things will turn out alright in the end, despite frustrations and set-backs. Optimism acts like a mental filter on the information we have to process, distorting it in a positive direction.

I say "distorting" advisedly because one of the most interesting research findings in psychology is that individuals with an unrealistically positive view of their own capabilities, exaggerated perceptions of personal control over events in their lives and unrealistic optimism about the future, far from being poorly adapted to life (as had been previously thought), turn out to be productive and creative in their work, successful and happy in their personal relationships and capable of caring for others.

Optimism also has a profound effect on behaviour and motivation, and particularly on the reaction to failure. Optimists react to failure and set-backs in a characteristic way, seeing it as something temporary, located in a specific context, over which they have some control, and therefore something which they can approach differently next time. Thus, far from deterring them, failure spurs them on to try again, try harder, try actively and persevere in their efforts. Hardly surprising then that optimism is a better predictor of individual success in many domains than actual ability.

2. Beware of those claiming to live in the "real world". In a crisis, there is never any shortage of doom-sayers, whose claim to legitimacy is that they live in the "real world", who pride themselves on their ability to see objectively just how bad things are going to get. Well, the same psychological research that identified life's optimists also identified a rump of pessimists. These are the people who are relentlessly "objective" about themselves, who see (correctly) just how little control they actually exercise over their lives and the future. They are under no illusion about how likely it is that they (and others) may fail in their endeavours. They point out the negative consequences attached to any action.

They know the future is uncertain and full of risk.

But far from helping them in their lives, this "objectivity" seems to paralyse and constrict them. Compared to the optimists, who entertain positive illusions about themselves and the world , the pessimists are less productive, less creative, and less motivated and active in pursuit of their goals. I put "objectivity" in quotes to underscore the fact that an individual's ability is not a fixed property. There is huge variability in the performance of ability and a major factor in poor performance is pessimism about outcome, worry, and self-doubt.

3. Optimism can be learned. For those not naturally blessed by an optimistic temperament, it is heartening to know that optimism can be learned. In fact, optimism is best thought of as a choice rather than a disposition. There are two key skills to be learned: the ability to create and maintain a positive mood and the ability to contain or isolate a negative mood. Natural optimists do this in a very characteristic way.

Faced with a challenge or a set-back, they spontaneously recall their past successes and moments of achievement and happiness. This not just fortifies their self-esteem and their courage, it produces a sense personal effectiveness and reduces stress, thereby facilitating the use of efficient, rapid problem-solving strategies and sparking off unusual and diverse associations that lead to more creative solutions.

Having initiated a course of action, they spontaneously provide themselves with positive feedback on their performance ("I'm getting there . . .One more thing done . . .This is easier than I thought"), which in turn produces better performance and a greater likelihood of achieving their goal.

Similarly, natural optimists are skilled at containing threat: that is, they recognise the threat but isolate it to its particular context rather than letting it leak into every aspect of their thinking. If they feel too anxious or overwhelmed by the potential negative fallout, they actively seek out disconfirming evidence of their worst fantasies. Their strategy is to gather up their own resources, to build themselves up, while at the same time scaling down the threat until it is of manageable proportions. Most tellingly, when the situation is uncertain or ambiguous (the most common situation in life) they interpret new information in a positive way, rather than immediately assigning it a threatening value. Or at least give the new situation the benefit of the doubt. These cognitive strategies have a psychologically reassuring and liberating effect, they motivate positive and assured action, and are thus more likely to succeed.

4. Pessimism can be unlearned. Faced with uncertainty, pessimists engage in exactly opposite strategies. They inflate the threat and deflate themselves. They immediately assume that the set-back or perceived threat as something permanent, not transient; as due to something enduring in their own psychology or make-up (they recall all the other examples of this weakness; and over which they can exercise little personal control. They compound the situation by generalising the failure far beyond the incident in which it originated ("200 jobs gone in the IT sector, that's the end of the Celtic Tiger").

In times of economic uncertainty and set back, such as we are now facing, it requires a mental discipline to learn to install mechanism of positive review, positive feedback and threat management. This kind of emotional intelligence work may seem a distraction from the "real" work of finding a new job, or a new market, or new inward investment, or even winning the election. But the way the "real" work is handled, the resources we can mobilise to face the challenges, will be determined in large part by the level of optimism that can be brought to bear on it.

I will leave the last word to David Landes: "In this world the optimists have it, not because they are always right, but because they are positive. Even when wrong they are positive, and that is the way of achievement, correction, improvement and success. Educated eyes-open optimism pays; pessimism can only offer the empty consolation of being right.

The one lesson that emerges is the need to keep trying. No miracles. No perfection. No millennium. No apocalypse. We must cultivate a sceptical faith, avoid dogma, listen and watch well, try to clarify and define ends, the better to choose means". (David Landes, 1998).

Originally published in The Irish Times. 

Posted: 29 December 2001