Scott H Young

The Danger of Easy Skepticism


I remember taking a class in business school, where we had to evaluate the financial prospects of startups. The startups were real, but the names were changed and in industries obscure enough that we rarely could guess the true identity without cheating.

Given limited information and numbers, we were each given one company and asked to present our analyses. Soon, however, a dominant strategy emerged: nearly every presentation predicted failure.

For the incentives of the classroom, that made sense. Most new startups fail, and for many different reasons. It’s easy to find a reasons for failure, and when you predict failure, you’re usually correct. As a result, the class taught us to practice skepticism, find reasons why things might go wrong.

But real life isn’t like the classroom. An investor with ten companies may see several fail, a few break even and only one earn enough to make up for all the past losses. Skepticism, in this instance, is easy but also not terribly useful.

Training Optimism

This doesn’t just apply to startups. More formally, it applies to any situation where there is an asymmetric prior probability of success and equal (or greater) asymmetry in the results of that success.

Put simply: When failure is cheap, but frequent, and success is lucrative, but rare, it pays a lot more to recognize successes.

You can imagine the situation in a 2×2 matrix:

  1. Failure cheap, failure rare: No-brainer optimism.
  2. Failure pricy, failure rare: Trained skepticism.
  3. Failure cheap, success rare: Trained optimism.
  4. Failure pricy, success rare: No-brainer pessimism.

When success is likely and profitable, we all feel optimistic. Similarly when failure is likely and costly, we’re all pessimistic. It’s the latter two situations, where rare events also have uneven payoffs, that our intuitions often betray us.

For a good talk about many situations where cultivating trained skepticism is a good idea, Nassim Taleb’s The Black Swan, is a great book. Other websites like OvercomingBias and LessWrong, provide a lot of tools and examples of trained skepticism.

I feel trained optimism is a somewhat less discussed skill, so I want to highlight it here.

Is Trained Optimism Underrated?

Giving an overly optimistic prediction or idea, and having it be wrong, makes you look gullible and foolish. Giving an overly pessimistic prediction or idea, and having it be wrong, is generally forgiven as being cautious. Therefore, if your goal is only looking intelligent, and you have no other stake in it, skepticism is the more suitable strategy. Indeed, that’s what I observed from our classroom experiment: almost nobody was willing to bet their flawed startup would succeed.

But what if you have real stakes and not just your conversational reputation? Not every domain of life warrants trained optimism, but some certainly do.

I think a lot of personal and professional projects largely fit under this category. There’s some minimal opportunity costs and extra effort, and most the time they won’t be great successes. But some of the time they will, so the person who keeps trying and experimenting will beat the skeptic in the long run.

Learning new things is almost always this case. I’ve learned many things that have never served a practical purpose in my life, but often the few that do are quite unexpected. Doing the MIT Challenge, for example, I found the classes on probability and logic more useful than many of the programming classes, something I hadn’t expected.

Optimism as a Skill and a Mood

Bear in mind, this trained optimism is about trying to more carefully pick winners (rather than losers) not a blanket policy of good feeling about every possible action one could take. Also, if the size of success is still dwarfed by its improbability, it’s probably still a bad decision.

In this sense, optimism is a skill. It’s focusing on improving your ability to pick good project candidates, business ideas, habits to follow and not worry too much about the ones that fail. It also means accepting slightly less accurate beliefs, for the extra payoff big wins can create.

But optimism is also a mood, not just a skill. I don’t think one can mechanically implement trained optimism (or trained skepticism, in the situations where that is better suited) without changing your mood about a certain area of life. When hard numbers aren’t available, we rely on moods as heuristics for processing the world and biasing our thinking in a favorable direction.

Being able to pick winners requires looking for ways things can go right and not just the ways things can go wrong. It requires tuning yourself to see the subtler positive signs instead of the overwhelming negative ones. In that sense, optimism is a cultivated emotion, not just a calculation, and at least some of the time, the smarter bet.


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7 Responses to “The Danger of Easy Skepticism”

  1. ii says:

    Well, basically you are talking about a distrubtion with a heavy positve skewness, which is called a “lottry like asset” in finance. Like IPOs and small growth stocks and so on. the problem is: these are the worst performing asset classes! while the opposite (heavy negative skew + kurtosis) ones are the best performing, because you get a high risk premia for beakring the tail risk of large losses. lottery tickets are overpriced, tail risk is rewarded in finance.

    so at least I would not use your startup analogy works good from finance, because the empirical results are the opposite of what you suggest.

  2. adbge says:

    Optimism is great. Here’s some stuff from my notes:

    In health promotion among a group of heart patients who were participating in a car- diac rehabilitation program, found optimism related to greater success in lowering levels of saturated fat, body fat, and an index of overall coronary risk.

    Pessimism is actually a stronger predictor of suicide than depression. (Beck, Steer, Kovacs, & Garrison, 1985)

    All permutations of optimism and pessimism allow for viable marriage, except one: two pessimists married to each other.

    Higher levels of optimism upon entering college predicted lower levels of psychological distress at the end of the semester.

    Learning optimism prevents depression and anxiety, halving their incidence over the next 2 years.

    And, the most important bit, from The Oxford Handbook of Positive Psychology:

    There is remarkably little evidence that optimists are ever worse off than pessimists.

  3. Thanks, Scott. I especially where you said those who keep trying and experimenting beat the skeptics in the long run.

    However, like you pointed out in the Subsection, Optimism as a skill and a mood, it is still careful and trained. It reminds me of the time when I talked about Calculated risks.

    Thanks for sharing this.

    God bless you.

  4. George Vander Meulen says:

    Here’s a little perspective from a sixty year old.

    When I was in my twenties I thought that if I tried ten things, only one or two were likely to succeed. I discovered that in fact, about eight or nine out of every ten things I tried actually did work. This realization led me to try out more and more ideas. I learned optimism.

    Simultaneously, all around me, I experienced business, religious and political leaders betray my trust. I learned cynicism.

    Cynicism is fed by the 24 hour news networks. It makes people bitter and angry and it undermines relationships. I’m personally acquainted with more than one thirty something who has already turned into an angry old fool.

    Now I guard against the danger of an easy cynicism. I cut the cord. I focus on reminding myself that for every cheat, there are a thousand well motivated people trying to do the right thing.

  5. Bob says:

    How do we make sure we are being optimistic over something realistic? There is evidence that suggests blind optimism can make a bad experience feel worse. You fall down harder from a blind optimist viewpoint. I’m all for optimism, but how do we steer clear from blind optimism, which is entirely different but so close to productive optimism?

  6. […] The Danger of Easy Skepticism: I’ve been thinking about how I can correct for my tendency to overestimate risks and effects. Time to train optimism, perhaps. […]

  7. Scott Young says:

    ii,

    Not exactly. I didn’t want to belabor the point in my article, but I did write this sentence:

    “Also, if the size of success is still dwarfed by its improbability, it’s probably still a bad decision.”

    In other words, if the expected value is negative (or less than other comparable asset classes) it’s a bad idea regardless. Lottery tickets are an obvious example of negative expected value.

    Besides, they’re also an example of an area where one cannot exert any skill in the selection of the outcome. Since there is no skill involved in picking lottery numbers, it really doesn’t matter what kind of mental mode you’re priming (i.e. searching for success or failure characteristics).

    For finance, in general, I think these rules are considerably weaker because the existence of mostly-efficient markets means that they are closer to lottery tickets than to most real-world opportunities (however, investments tend to have positive expected value, as opposed to gambling). For most widely traded assets, the skill premium measured is near zero, so this kind of thinking is better substituted for just trying to get the market rate of return.

    This type of thinking particularly applies to areas where there is a significant skill premium, net expected values are positive (including opportunity costs) and wins are large and rare with losses being ubiquitous and cheap.

    -Scott

Debate is fine, flaming is not. Pretend that this comment form is a discussion taking place in my house. That means I enjoy constructive criticism and polite suggestions. Personal attacks, insults and all-purpose nastiness will be removed especially if it is directed at other readers.

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