The boundaries of optimism
by Tom Brakke, Research Puzzle
A recent article in Financial Planning was titled, âWhy Optimism is Crucial for Advisors.â When I saw it, I was reminded of an exchange about optimism between Michael Mauboussin and Daniel Kahneman (provided by Elliot Turner). Kahneman said, âI donât want a financial advisor who is an optimist.â
The FP headline is a bit misleading as to the contents of the article. While optimism is mentioned at the top by Denise Federer, the author, the piece is much more about advisors realizing the importance of good communication skills, building trust, having a strong self-awareness, and shifting thinking âfrom certainty to curiosity.â
The optimism part of it boils down to believing in goals and sticking to them as a path to business success.
Kahneman looks at it a bit differently. While agreeing that âoptimism is the engine of capitalismâ and âeveryone should wish their children to be optimists,â he cautions against blind optimism that ignores the odds (while acknowledging that big advances come from some of those ill-advised forays).
Indeed, advisors (and other financial professionals) might well benefit from optimism when it comes to the operation of their businesses, but â and this is Kahnemanâs point â their work on behalf of clients demands realism. When the odds are attractive, you should be optimistic; when they are against you, you should be pessimistic.
Unfortunately, the investment industry promotes its wares primarily based upon the popularity of investment ideas and/or their historical performance rather than their underlying attractiveness for the future. (Thatâs the way the business models work.) An advisorâs unfounded optimism can translate into a clientâs dashed hopes and unfunded dreams.
A healthy dose of skepticism is of great value for the buyers of investment services. It tends to keep the boundaries of optimism where they belong.
Copyright Š Research Puzzle
