Imagine 2 groups of people.
Let’s call the first group The Realists.
These people think of themselves as rational. They believe in science. They don’t believe in Magic Fairydust or Pixie Dreams. They may end up as engineers, accountants, doctors, or actuaries.
The second group believe that positive thinking can help them achieve their dreams. They may end up as entrepreneurs, strategy consultants, salespeople or CEOs. Let’s call this group The Dreamers.
I think we all have both elements inside us. You could think of all of us falling somewhere on a spectrum with Pure Realist at one end and Pure Dreamer at the other.
If you are unsure where you fall on the spectrum, have a quick listen to a bit of this song:
You can get an idea where you are on the spectrum by your gut reaction. If this was to go “Woo-hoo, yeah baby!…let’s reach for the stars!” , you are probably more of a Dreamer.
If, on the other hand, you experienced an adverse reaction, you may be more of a Realist. Amongst this group, typical reactions include disbelief, queasiness and, in extreme cases, vomiting.
We may change where we are on the Realist – Dreamer spectrum as we go through life. For example, when my daughter was 4 years old, she was a Dreamer. If we put on Reach on in the car driving down to France on holiday, her reaction would be one of pure joy. It was like catnip to her. She would sing along, her little arms would shoot into the air… sometimes even in time with the music.
My daughter is 15 now and she’s going through more of a Realist phase. This involves teenage attitude and disagreeing with just about everything I say (even when I’m agreeing with her). If I were to put on Reach and ask her to sing along, she’d probably punch me in the face.
This highlights how people often move from the Dreamer end of the spectrum towards the Realist end of the spectrum as they get older. With my daughter, I’d like to think this is a good thing and a sign of growing maturity. After all, we all need some scepticism and to be able to think for ourselves.
But in other cases, it can be a shame as someone gives up on their dreams and becomes sour, grumpy and cynical. Cynicism seems superficially smart but its a trap because you’ll miss the genuine opportunities that exist in the world. So The Escape Artist is all for rational scepticism…but not cynicism.
Which brings me to the book Flourish by Martin Seligman. Now, based on that title alone Realists may be feeling queasy. But I’m here to tell you that Seligman is a Realist who has spent his career gathering evidence for the beneficial effects of being a Dreamer(!).
Seligman presents a compelling case, backed by many studies, that show the benefits of positive pyschology including optimism, community, meaning and purpose, exercise and challenge in life.
Seligman is the lead professor of Pyschology at The University of Pennsylvania. Seligman does not believe in Fairydust and Pixie Dreams. He believes in data-rich longitudinal studies involving thousands of participants measured rigorously over many years. He believes in science, rigour and statistical significance.
Which makes it ironic that Martin Seligman has ended up being known as the founder of the Positive Psychology movement. As such, he sometimes gets trolled by grumpy people. And, being only human, Seligman can’t resist having a pop at some of those cynics at points during his good-humoured book.
The book includes a fascinating section in which Seligman says there are 2 types of reality. When I read this, it struck me as both blindingly obvious and yet totally brilliant at the same time.
Let’s have a closer look at these 2 different types of reality.
1. Objective reality
This reality is independent of what we think. It is the objective truth sought by scientists and engineers. An example would be the laws of physics…like if you jump out of a plane without a parachute, gravity pulls you downwards at a velocity increasing by 9.80665 metres per second.
If you are falling from an aeroplane with no parachute then, to use the correct physics terminology, you are Officially Fucked. You can think positively. You can visualise yourself flying. You can flap your arms. You can Reach For The Stars all you want…but you are still gonna end up the same way. Gravity is a bummer like that.
2. Subjective reality
In contrast, the other sort of reality is influenced (and often determined by) what’s in our minds: our beliefs, expectations and perceptions.
In finance, market prices are strongly influenced by the beliefs, expectations and perceptions of the market participants. For example, if everyone believes that Twitter is worth $100bn, then it will trade at a market value of $100bn…regardless of whether it will ever make any profits or pay any dividend.
Investor psychology is an incredibly powerful thing. And it influences the real economy, not just market prices. If investors believe that Twitter will survive and make profits, that can become a self fulfilling prophecy. If investors believe (rightly or wrongly) that Twitter will be a winner, they’ll be prepared to buy Twitter shares when its fundraising. So the loss-making Twitter gets funded and lives to fight another day. Maybe even long enough to make a profit and pay dividends in future.
This is the version of reality that operates in most of our life…anywhere where the human factor is at play…so that includes work, relationships, health and fitness. Crucially, this version of reality applies in personal finance and in your career.
Limiting beliefs work in a number of ways to stop people getting rich. Remember, a limiting belief is a belief that isn’t true but the fact you think it is, holds you back. If you think that it’s impossible to get a great job, then you will never even apply. It becomes a self-fulfilling prophecy.
If you believe that the stockmarket is only for rich people, you won’t get the incredible compound returns that come from stockmarket investing and you won’t become rich. It becomes a self-fulfilling prophecy. Your beliefs drive your actions which drive your results.
Seligman gives an example of a subjective reality that influences your life: how positively you view your spouse.
Professor Sandra Murray has done an extraordinary set of studies on good marriage*. She carefully measures what you think about your spouse: how handsome, how kind, how funny, how devoted and how smart he is. She poses the very same questions about your spouse to your friends and derives a discrepancy score: if you think more of your spouse than your friends do, the discrepancy is positive and vice versa. If you are a realist and see your spouse exactly as your friends do, the discrepancy is zero.
The strength of the marriage is directly a function of how positive the discrepancy is. Spouses with very strong benign illusions about their other mates have much better marriages. The mechanism is likely that your spouse knows about your illusions and tries to live up to them. Optimism helps love, pessimism hurts it….the literature puts health in the same corner as marriage: pessimism undermines health and optimism promotes it.
*Reflections on the Self-Fulfilling Effects of Positive Illusions in Romantic Relationships: Love is not Blind, but Prescient – Journal of Experimental Social Psychology (1996)
What if you’re single? Your beliefs still influence your outcomes. If you walk up to an attractive stranger at a party and start chatting, the outcome will be influenced by your belief and confidence going in (confidence is attractive because its a signal of evolutionary fitness). If you never gather up the courage to go to the party or talk to that person, you’re not going to get lucky.
Your personal finances are driven by how you feel, think and act. Your beliefs about money and freedom massively influence your outcomes. If you believe that its impossible to build wealth because [X, Y or Z], you won’t save money or invest it. You’ll create your own reality and fulfil your own prophecy.
The trick is to understand your Money Blueprint and see the blind spots and limiting beliefs that we often have. On the Path to financial independence, its important to balance your inner Realist with your inner Dreamer.
The Realist knows that frugality is vital because you can only invest what you’ve saved. But we all need a bit of Dreamer from time to time. Its the Dreamer in us that dares to believe that financial independence is even possible. Its the Dreamer in us that shoots for the promotion or even starts their own business. This is The Magic of Thinking Big.
This is why we should all cultivate optimism. Or, as Seligman puts it:
I am all for realism when there is a knowable reality out there that is not influenced by your expectations. When your expectations influence reality, realism sucks.
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