The 2 types of reality


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.


  1. eromgiw · · Reply

    “velocity increasing by 9.80665 metres per second.” Actually metres per second per second… until you reach terminal velocity when air resistance balance gravity. And you are pulling the planet towards you as well as vice versa. 🙂

    1. Yes, thank you for the correction. If you’ve followed my diet advice you wont be pulling the planet towards you very strongly 😉

  2. Playing with Fire · · Reply

    “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.”

    Is this original? I have never seen a complex idea so eloquently expressed. Thanks for the laugh also.

    1. Oh yes…that section is 100% TEA original 🙂

  3. you need your inner dreamer to come up with ideas and your inner realist to check them before your act on them – works well with trading although can be a bit clumsy for life in general.

    Scott Adams gives some good advice in How to Fail at Almost Everything and Still Win Big

    1. Yep, I also enjoyed the Scott Adams book

  4. Does the book offer advice on how to be optimistic? It seems like something difficult to control consciously.

  5. Members of evangelical religions seem happier, but I’ve no idea how to be such a person, as to me God does not exist, and I can’t imagine how to change that. Is this a limiting belief, as while it holds me back, it is still clearly true.

    1. Hi John

      I know what you mean.

      Religious people have some help being happy. They get that help from things like community, purpose, meaning, coaching, perspective, some quiet time and self development…all things which are 100% available to atheists!

      For example: see here


      1. The Rhino · · Reply

        On this subject, ‘Religion For Atheists’ by de Botton may provide some enlightenment. Perhaps he is delivering the talk at TSOL? God is the mothership of all placebos and does provide enormous benefit to a huge no. of people. Where you sit on the placebo debate depends on whether you would rather take the blue pill or the red pill.. which kind of brings us round to the purpose of this article.

        PS those Cynics get a tough time from the modern interpretation of the word. It wasn’t all about living in a barrel and sneering at happy people.

  6. meglinson · · Reply

    Lower one’s expectations of yourself and others…works an absolute treat. I’m the world’s most easily pleased person!

  7. ianeholliday · · Reply

    Thanks for another interesting article, but it did touch a nerve when you brought up Martin Seligman and positive psychology. I’ll not digress into my own career but I may well fall into the category of grumpy people you mention on this one. In recent years, up to the time I took early retirement, to some extent as a result of this grumpiness, I became more and more aware that there are serious concerns about the strength of evidence for much psychological research, though as you say Seligman, like every academic psychologist, in principle proceeds on the basis of statistcally argued experimental evidence. Unfortunately though, the bulk of studies in psychology, and as it happens medicine along with other disciplines, are probably undermined by low statistical power, and a host of other potential failings. For a taster read this: (it is my ‘go to’ reference on this matter so forgive me if I have bothered your blog with it before):

    Ioannidis, J. (2005). Why most published research findings are false. PLOS MEDICINE, 2(8), 696–701.

    It is available for free download from public library of science

    How depressing is that? Actually not at all for most academic reserachers, as they can still get papers published, often with less rigour and effort than strictly necessary, and still obtain grants, get promotions, and maybe get famous. Yippee. Do students learning about this stuff care? Not much – they want to learn basic, mainstream ideas provided unchallenged in simple sources, to minimize effort and maximise grades. After all you have to go deeper into a subject before you become equipped to critically evaluate it, so anything else means a much more difficult learning experience. Not popular.

    Maybe Ioannidis’ view is rather too extreme, and his title arguably more click-baity than stone-faced academic fare ought to be, as for example this (not peer reviewed) blog article I just found argues but nevertheless there is a growing body of work that shows there is a lot to be concerned about. I’m resisting going off on one here, so I’ll stop that train of thought now….

    [Editors note: good idea…rest of comment removed]

    1. So…not a big S Club fan then?

      1. ianeholliday · · Reply

        On the contrary, In the right context I can be very enthusiastic sbout them – say, work’s christmas night out, after a few pints of guiness and a couple of Jaeger shots, in Flares on Broad Street and I could give your five year old daughter a run for her money on clearing the disco dancefloor when that track comes on.

        1. Nice comeback…I like your style 🙂

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