The Future – Why Optimism is more Rational than Pessimism

I’m a recovering pessimist.  I used to joke that I am not a pessimist, I’m a realist.  And the only reason I sound negative is because so much in the world is negative.  There is some truth to this of course.  There are a lot of problems.  But there are also a lot of wonderful things in this world and those are the parts that I am recognizing and appreciating more and more as I get older (or maybe now that money isn’t a big stress?).

Unfortunately we humans seems to be biased to focus on bad news.  Compelling research shows how this is a strong evolutionarily link within us all.  We are fearful creatures.  After all, not too long ago, the person who wasn’t hyper-aware of risks was the first to get eaten by the lion, or fall off the cliff they were climbing, or die of exposure because they weren’t prepared for that unexpected weather front.  Our ancestors who survived to pass along their genes were the cautious ones.

In our safe, modern world, this becomes a huge handicap.  It leads to unhealthy, ongoing stress as we get irrationally upset about so many things.  That presentation for work induces the same fight or flight biological stress response as seeing the lion in the grass.  Project deadlines.  “Accountability” for financial results when you have limited direct control over them.  Disagreements with others.  Financial worry.  Constant distractions, noise, lights, etc.  Lack of sleep.  Constant negative headlines in the news.

All of this wears us down until it seems that life is hard and mostly negative.  It doesn’t seem like things are getting better.

In fact, it seems mostly like things are bad and getting worse.

This is certainly how I’ve felt most of my life.  But I have news for you (and myself) based on what I’ve learned over the last few years.

It’s always felt this way, but it hasn’t actually been this way.

Based on the research I’ve seen, at any point in time (at least in modern life), it seems people view the past more positively, the current as negative, and the future as becoming worse.  Again, we just seem to be wired this way.  But the facts don’t really support this viewpoint.

Certainly there are some things that are worse than they used to be but as a whole, things have gotten better over time for us humans and all evidence points to things continuing to get better in the future.

The rosy remembrance of the past is particularly interesting.  It’s out of scope to go into all the science here but it’s quite clear that we have selective memories of the past.  In particular, our recollections of the past are more positive than our perception at the time.

This is why women go through childbirth multiple times.  It’s why our memories of a vacation are usually much better than the vacation actually was.  It’s why people do physically miserable things like marathons or climbing mountains multiple times, even though it’s common half-way through to swear you’ll never do such a stupid thing again (guilty here).

In a short amount of time, the good parts are remembered and the bad parts fade in intensity.

So we have an irrationally positive view of the past.  Which means in comparison the present usually seems a bit worse.

But our real negative bias comes about the future.  We simply seem bias to avoid change and view the future as risky.  It’s part of our evolutionary wiring.  Fear is a big driver of our thoughts and emotions and we fear the unknown.  The future by definition is unknown.

But the data of human history runs contrary to this feeling so let’s look at some rational reasons for optimism.  Even though it doesn’t “feel” right, optimism appears to be the better evidenced-based viewpoint to have for our futures.

As an aside, being more optimistic about the future can help you be a better long-term investor since you’re more willing to invest in things like businesses (stocks) or real estate that increase in value over time.

So being more optimistic about the future can make you happier and wealthier.  Seems like it’s worth considering!

I recently read an interesting book on the topic,

The Rational Optimist: How Prosperity Evolves (P.S.)

where the author Matt Ridley reviews human progress throughout history, underpinned by trade, technical progress, and specialization.  He covers a broad range from early human history, to farming, formation of cities, modern innovation, and thoughts on the future.

I certainly don’t agree with his style or all his points but on a whole, he makes a solid, evidence-based case for how things have gotten better for most people throughout history.  He also describes the past pretty well, reminding us of the not-so-nice features of the past that we often forget.  I also appreciated the coverage of interdependence and specialization.

As someone who is quite independent (like many in the FIRE community) and likes to do a lot of things on my own, it’s still important to realize that real, increasing value is generally created through being interdependent with many other people.

I’ll cover a few examples from his book but add many other points from other sources that reinforce the same point of things improving over time and likely to keep doing so.

 

Modern health is so much better than it was in the past. Certainly the scientific understanding of germs and infection made a giant leap forward.  Now that doctors wash their hands before surgery, many injuries that used to lead to death or lifelong debilitations, are often temporary discomforts followed by full or nearly full recoveries.

The invention of vaccines helped millions. I doubt there would be much of an anti-vaccine voice if the diseases of the past came back at the rates they existed in the “good old days”.

The list of health advances could take up pages so I won’t belabor the point. Just remember, that despite the significant challenges we have in health care today (as an American, I can vouch that the current system is baffling, irrational, and very expensive), our actual health throughout life is amazing compared to the not-so-distant past.  And remember that many of problems in health care today are more political than scientific.  The actual medicines, surgeries, and understanding of the human body are better than they have ever been, and they will continue to get better.

Transportation has advanced amazingly. Not too long ago, transportation by boat was critical.  The first large cities grew up around ports because so many goods could be shipped and then traded so efficiently.  The railroads made another big step change in connecting people and markets.  Now we have a huge network of roads so that you can get delivery of almost anything in a few days anywhere in the US, sometimes even the same day (thanks Amazon prime!).  Try going back in time and explaining that to the early postmen and see if they aren’t flabbergasted.

And air travel. We can actually fly many hundreds of miles an hour to almost anywhere on the planet.  Almost everyone can afford an airplane ticket and many people visit many countries in their lifetime.  This has connected people face-to-face around the world in a way that’s incredible, and helped drive a lot of positive change in understanding each other.

Not too long ago, before cars and planes, most people never ventured further than about 35 miles in their entire lives from where they were born. No large collection of vacation memories back then.  The amount of freedom we have to explore our amazing world now is amazing.

There were many breakthroughs in the past that we now take for granted because they are simply and integral part of our lives.  Modern agriculture.  The cotton gin.  The printing press and then the internet led to exponential knowledge sharing which drove amazing advances in society.  Indoor plumbing.  Hot showers, lighting, indoor cooking without building a fire, all on-demand each day for a cost equivalent to a few minutes of labor at the median income.

Most of us live in world of luxury that our forefathers couldn’t have dreamt of. Not too long ago, orange juice in non-native areas was only affordable to the few super rich.  Ice cream was only available to the king and his few favorite guests.  Now even those on a low income can drive down the street in their personal transport machine with the power of hundreds of horses and pick up ice cream in an array of flavors, returning to their air-conditioned personal living space to watch a move for a few dollars that cost tens of even hundreds of millions to produce.  This is pretty incredible.  Someone from the past would rightly see this as living better than a king.

Modern technology is certainly an area that gets a lot of press today, given the rapid change. Certainly there are bumps in the road.  Expectations of 24 access for work and it’s ongoing stress, struggling to find quality time with kids, and more.  But remember at the heart of it all, the internet has enabled connections between others like never before.  Marketplaces have been a huge beneficiary.  Amazon, ebay, uber, Airbnb, online stock trading, Vanguard index funds, and the many others are essentially connecting buyers with sellers in a more efficient marketplace.  You can see by their stock market valuations how valuable this is.

Block chain technology is set to take additional friction out of financial transactions. Fintech is making portfolio management and retirement planning easier and cheaper.  The list goes on.

In the future, we will certainly had to make sometimes painful adjustments. We’ll stumble along the road of innovation just like we always have.  But so many things will get so much better.

And we have an amazing ability to fix the problems that do arise. Anyone see photos of the smog in the big cities in America a few decades ago?  I grew up when acid rain was going to kill all the fish and forests if left unchecked.  CFCs were destroying the ozone layer.  While things like global warming are real, and are serious problems, I’m also convinced we’ll find a way to both adapt and start fixing the issue before we face mass extinction.

So what does the future look like? We can make some near-term guesses based on extrapolation of progress happening right now but really, your guess is as good as mine.  But I’d bet it’s going to be cool.

Maybe we’ll have flying cars. At least self-driving ones are coming soon.  Imagine a self-driving car so safe it could be designed more like an entertainment pod.  You could sleep, watch movies, or play games with your family as you were traveling cross-country to visit national parks or visit a relative.

Solar power will be more commonplace as prices continue dropping. Energy efficiency continues to increase greatly.  Cars are mainly electric, and still affordable.

Education shifts from just an expensive college degree to a more mixed model including a lot of low-cost online content drive learning.

Cancer treatments improve in effectiveness.

Global conflicts continue to decline as world commerce continues to get more interconnected. Extreme poverty also declines.  A more common set of global standards slowly arises around human rights, environmental practices, worker safety, and more.  Rule of law continues improving around the globe.

Remember that despite the current headlines on income/wealth inequality, even the richest among us don’t have the power or separation from the rest of us that Rockefeller, or Carnegie had, let along the kings, queens, religious leaders, and feudal lords before then.

When you sit down and think about it, you could add hundreds of current examples to those I have listed here.

How about some example closer to home for the FIRE community to wrap up this post?

Retirement itself is actually a quite recent concept.  Before then, you simply worked until you died and it was often longer hours than we work today.  Regardless of whether the life expectancy of the time was 25, 45, or more.  Social security, formed in 1935, was designed at a time when the average life expectancy was about 60, meaning it was insurance against the unlikely event that you lived much beyond that age.  It wasn’t meant to fund a good portion of income for hordes of people 20 or more years beyond age 65!

Early retirement and now extreme early retirement are even more recent data points of “progress”. Yes it’s a challenging goal.  But they fact that it’s actually achievable to quite a few people, even for some with relatively low incomes, is amazing.

Some of this is due to generally decent pay in many jobs, but probably the bigger factor is broader and cheaper access to compounding investments.

As an important tangent to this article on optimism, keep in mind that you need optimism in the future of business and innovation to be a really good investor.  Stock investments, one of the biggest drivers of wealth over time, is driven by earnings that grow over time.  Earnings growth through improved productivity, driven by innovation.  Having faith that humans will continue making progress will help you be a more confident business investor.

Remember, the value of a business is in the future cash flow. Businesses are priced rationally (usually) based on near term cash flows looking out a few years at most, which is why you see P/E ratios for the current year or forward P/E ratios for the next year.  But the real value is generated as earnings slowly improve over the next ten years and more, making the business more valuable over time than the current price reflects.  This is where your compounding gains come from (and dividends that also increase over time).

The other portion of the FIRE equation, frugality, is the other big one. The fact that you can live a good lifestyle with very low spending means that a lot of key basics of a good life are quite low in cost compared to the average income.  In a broad sense, this is mainly due to human productivity advances through innovation over time.  It wasn’t that long ago that the cost of food alone took up half the family income.

So hopefully this gives you some food for thought on optimism for the future.

In my view, the biggest negative of modern life, at least in Western societies, is the lack of time.  In particular we spend too much time working.  While I believe meaningful work is a key positive to happiness, feeling forced to work doing things you don’t like or much longer than you’d like, is not a good route to fulfillment.

As people continue to slowly get wealthier as productivity continues to increase, I think we may see an age where we actually start to get more balance in our lives.  It’s not completely crazy to think that we all may start working fewer hours in the near future (I’m hopeful this occurs during my kids lifetime).  I know this has been predicted but never seems to actually happen but I think it just might.  It’s an extension of some current trends like early retirement and a slow shift back towards one income families.

Many people already have enough money for all the stuff they need.  As long as education, health care, and child care (the real reason most American’s don’t save more by the way) don’t keep going up at multiples of inflation, people will have more excess money.  Maybe they will choose to buy more and more time with that extra money, fixing  one of the biggest negatives of modern life.  That would be a pretty nice future wouldn’t it?

So turn off the local news (I’m horrified by this when I periodically tune in while traveling after cutting cable many years ago).  Don’t listen to your doom-and-gloom friends tell you about the latest problem or concern, and try to disconnect your lizard brain from the seemingly important conflict at work that day.

If you reflect more holistically on the good and bad in the world, I think you’ll realize that things have actually gotten better….a lot better….and are most likely to continue to do so. And that’s nice to realize.

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