The Economic Power of Positive Thinking

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By Charles Kenny,

from Bloomberg Businessweek,

Even if our pessimism were grounded in reality, studies suggest it would be better for the economy if we pretended to be optimistic.

As Americans size up a new year, optimism appears to be in short supply. Despite strong economic growth and a falling unemployment rate, gloom about the country’s long-term prospects remains pervasive. Hopes for the next generation are particularly fragile. A poll by Hart Research Associates and Public Opinion Strategies suggests that 76 percent of Americans aren’t confident that life for their children will be better than it’s been for themselves. That’s an increase from 42 percent in December 2001. Europeans are almost as pessimistic. A 2014 Pew Research poll of global attitudes found that in 10 North American and European countries, 65 percent of respondents said today’s children would be worse off financially than their parents.

Even if our pessimism were grounded in reality, we would have a better chance of improving our economic fortunes if we pretended to be optimistic. For the sake of our children, we need to snap out of our funk about their futures.

People in rich countries do have some legitimate reasons to worry. Median household income in the U.S. is pretty much at the same level as it was in 1989, and the last few years have been grim for economies across Europe. But it’s myopic to base expectations about the next generation so heavily on the last five years of tepid recovery from an enormous economic meltdown.

The faster growth in the developing world over the past few years explains why people there are comparatively optimistic, according to Pew’s polling. In China, 86 percent thought children would be better off than their parents; in India and Nigeria, it was more than 60 percent. Across 25 emerging markets, only 25 percent were pessimistic about the financial prospects of their kids.

Of course, banking instability, political turmoil, corruption, suffocating pollution, and other crises could slow growth in China, India, and the rest of the developing world. Just as Western pessimism is excessive, perhaps the developing world is too optimistic. However, research suggests overoptimism is a considerably better characteristic to possess than the opposite.

These studies are among others that have found people who are happier do better in terms of income and health. Carol Graham of the Brookings Institution looked at people who reported being happy in Russia in 1995. By 2000, the happier people had higher incomes than the less happy ones and were more likely to be in good health.

Over the short term, it’s unsurprising that fast economic growth makes people more optimistic. Over the long term—periods of 15 years—it appears that happiness and optimism are a driving force behind even stronger economic performance, encouraging risk, experimentation, and hard work, according to a cross-country analysis by Stefano Bartolini of the University of Siena.

When it comes to kids in particular, a positive outlook on life matters. According to research from 1994 to 2008 conducted by Jan-Emmanuel De Neve of the London School of Economics and Andrew Oswald of the University of Warwick, U.S. adolescents who reported themselves as very unhappy ended up having incomes as adults that were about 30 percent less than the average for their age cohort. Happy adolescents went on to earn 10 percent more than average 14 years later.

There’s an irony in these benefits of optimism: The happy really do wear rose-tinted glasses. According to neuroscientist Tali Sharot of University College, London, the group of people who turn out to be most accurate about predicting how long it will take to complete tasks—and how likely they are to succeed—are the clinically depressed. Optimists underestimate how difficult it will be to succeed. But that self-deception is precisely what makes them willing to take more risks and invest in a better future, while the pessimists slouch toward self-fulfilling failure.

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