Why do we tend to pay more attention to pessimistic narratives than optimistic ones?
In his podcast Why Pessimism Sounds Smart, Morgan Housel explores this phenomenon, which is particularly evident in the current stock market context. Here are three key reasons behind this trend:
1. Progress Is Slow, but Disruptions Are Sudden
Progress happens so gradually that it often goes unnoticed, while disruptions occur abruptly and immediately capture our attention. For instance, since 1960, deaths from heart disease have decreased by over 70% per capita, thanks to technological and scientific advances. This represents millions of lives saved, but such steady improvements—at a rate of just 1–2% annually—rarely make headlines.
In contrast, dramatic events like the 9/11 attacks, which altered everything in mere minutes, dominate the news. In the stock market, the S&P 500’s earnings per share have more than doubled since 2010, with an average annual growth of 6%. Impressive in the long term, this gradual progress is too slow to make the front page, which instead highlights rapid, unexpected fluctuations.
2. Pessimism Demands Action, Optimism Requires Patience
A pessimistic message often prompts action to avoid a perceived danger, whereas optimism suggests staying the course, which can feel passive.
In finance, analysts predicting dire scenarios like a market crash draw more attention, as their warnings call for defensive measures. By contrast, an expert forecasting an average 7% market growth garners less interest, as such a message doesn’t necessitate immediate action. This dynamic amplifies the visibility of pessimism, even though optimism often proves accurate in the long run.
3. Pessimism Extrapolates Without Considering Adaptation or Change
Pessimistic narratives tend to project current trends while overlooking people’s and organizations’ ability to adapt, as well as the potential for negative situations to improve.
Take, for example, the tariffs Donald Trump has proposed. Many predict a catastrophic outcome, immediately assuming the worst-case scenario. Yet these analyses often ignore businesses' capacity to adapt—such as stockpiling or relocating production—or the possibility that Trump might soften his stance and adopt a more conciliatory approach. Such adjustments or shifts are often absent from pessimistic projections.
When faced with challenges, markets and businesses frequently find unexpected solutions, reminding us that while progress may be slow, it is a consistent force.
Source:Morgan Housel. Why Pessimism Sounds So Smart, The Morgan Housel Podcast, November 15, 2024.
Comments