Why Financial Optimism is Irrational

Image attribution: Kromkrathog; standard royalty free license

Optimism is a great thing and fuels powerful inspirations to achieve, accomplish and perform. However, it is undeniable optimism is also based on varying levels of hope or unproven belief about the future. That is a very unscientific and logically invalid reason to pursue certain courses of action or perhaps just an unwillingness or inability to face the truth.

According to Time Magazine, realists who saw problems in financial management were "culled as negative people", but they were right. Even so, everyday financial optimism makes itself evident in the lives of millions of people who sincerely believe they will succeed in life's pursuits, but sometimes they just end up being the basis for the  success of others, if not undue victims of ill gotten gains.

To illustrate the irrationality of financial optimism, how many times do individuals, corporate executives, managers and politicians secretly cross their fingers after making a decision, making a public announcement or encouraging employees? Given the motive of corporations, it makes some sense to lie to employees, but that does not make it rationally sound, just cleverly manipulative. The Onion makes this clear in a humorous way. So what good is realism in a workplace where blind optimism is so much better for productivity, revenue and earnings per share? 

Image attribution: Teerapun; standard royalty free license

For financial optimism to be at least somewhat rational it is often justified by principles such as hard work, education, competition, and "proven methods". After all, there is substantial evidence that people who do work hard achieve things in this world. Literally millions of people are living their dreams quite happily and many of them achieved those dreams with hard work. Moreover, according to Saurage Marketing Research the number of American families with net worth's over $1 million is expected to double by 2020. Take a closer a look though. 

• $1 million will be worth less in 2020 due to inflation
• Nine reds on a roulette wheel do not guarantee black the next spin
• 33-69% of small businesses fail per CNN Money and Dunn & Bradstreet
• Persons aged 35 have an 18% probability of death prior to age 65 
• Nearly 25% of Americans have no net worth per the Economic Policy Institute

The list goes on and for hard work to pay off, the conditions have to be right. For example, hard work in the Soviet Union would earn one not a penny more than the next person. Hard work also doesn't pay off when shoveling a mud slide during a rain storm. In other words, there has to be a functional economy for financial optimism to have a sound rational basis. Moreover, if companies aren't getting rich enough in the wealthiest country in the world, what exactly does it take for them to start hiring people? Perhaps they are the ones who need to reassess things the way they are.

Today the U.S. economy is functionally challenged. Recent Bureau of Labor Statistics data shows 14.5% of the U.S. workforce is barely making enough to live on, if that, given the cost of living within the U.S. The labor force participation rate has also reached near 30 year lows per the BLS.  It could be a lot worse, but it seems things are going to have to change if financial optimism is to have a substantially higher basis in economic reality. Let's hope that it does!