Self-delusion is not a valid coping mechanism. In order to protect their capital, investors should remember this at all times. In the midst of a national crisis, citizens should remember it, too.
Under normal conditions, optimism is a desirable trait. Optimists have a natural ability to enjoy life. Seeing the bright side of things is good for mental health, and it’s a form of motivation to see the glass as half full.
But optimism at the wrong time, or in the wrong amount, has a dark side. If optimism stands in the way of action, or justifies a lack of action, it becomes dangerous.
Worst of all is a commitment to optimism so strong that it creates self-delusion. When a person is so determined to be optimistic that they lose touch with reality, or starts creating their own reality, they can hurt themselves or others.
In high-stress situations, there are healthy reactions and unhealthy reactions. When stress reaches the point of overload, different people react in different ways.
One person responding to stress overload might get angry and start yelling, for example. Another might show “analysis paralysis,” freezing like the proverbial deer in the headlights.
Yet another person might rely on habitual optimism, willing themselves to feel optimistic — and pushing even harder when stress levels are high. This is the self-delusion path. When it happens in the face of real danger, it can make an outcome much worse.
Imagine two families who live in two beach houses, right next to each other on the Florida coast. Now imagine news of a hurricane heading right toward their beach.
The first family hopes for the best, but prepares for the worst. They pack their things, secure the house as best they can, and get in the car and drive away. Safely on the road, they can afford to be optimistic. They can hope the hurricane doesn’t hit the house — but if it does, they are safe, because they did what they needed to do.
This attitude of “hope for the best, prepare for the worst” is an example of constructive optimism. Once you’ve fully prepared, you can then look on the bright side and root for a good outcome. If a bad outcome materializes, it’s OK because you were ready for it.
Picture the second family embracing optimism, too — but without leaving the beach house. Rather than making preparations and getting on the road, they use the power of positive thinking to convince themselves the hurricane will swerve. They just “know” their beach will be spared, and that even if the house is hit, the house will be OK.
Staying in the beach house and hoping for the hurricane to swerve is an example of self-delusion. It is optimism gone bad. Instead of “hope for the best, prepare for the worst,” it is “hope for the best and convince yourself the worst can’t happen” — while taking no action, with potentially devastating consequences.
Self-delusion can be an emotionally attractive option when all the other options are bad. If reality is serving up a roster of hard choices — each one tougher than the last — it is sometimes tempting to create one’s own reality instead, in which delusion changes the landscape.
The self-delusion trap can happen to smart and rational people. Even the smartest investors in the world can sometimes make baffling decisions.
Most experienced investors, if they are honest, have stories from their past of how emotion got the best of them. If it happened under high-stress conditions, or in the presence of strong desire for an investment to work out, they may have fallen into the self-delusion trap.
If you find yourself trying to reach someone caught in a self-delusion trap, be aware that logic may be useless. When an individual seems to reject reality, or refuses to acknowledge reality in ways that are baffling, it may not be a lack of familiarity with the facts.
It might be instead that their emotions have taken over, in which case “the facts” are either 1) no longer a factor for them, or 2) the source of their emotional distress in the first place.
When a person’s self-delusion comes from emotional turmoil rather than factual misunderstanding, trying to “talk sense into them” can thus make the problem worse. They need an emotional intervention, not a logical one.
In a crisis environment, all of this becomes even more important.
When markets are stormy and volatile, for example, it is more important than ever for investors to honor risk points, practice good risk management, and review their portfolio with a calculating eye.
And when a nation is in crisis, the most effective leaders will put emotion aside — hoping for the best yet preparing for the worst — while combining constructive optimism with hard-nosed realism, working hard to reduce risk and facilitate the best realistic outcome.