According to the World Bank, in 1981 about 42% of the world’s population was classified as extremely poor (less than $2.10 per day in today’s dollars; barely enough to afford food). However, over the past three-plus decades, the percentage of people living in extreme poverty has declined from over 40% to less than 10%. This reduction in poverty is impressive.
Surprisingly, however, a few years ago when over 1,000 Americans were asked, “Has the percentage of the world population living in extreme poverty almost doubled, almost halved or stayed the same over the past 20 years?” only 5% of respondents provided the correct response. Evidently many people are doubtful, exhibiting some form of hostility toward optimism, believing for example that the world used to be a better place. This embrace of gloominess was even observed by British political economist John Stuart Mill, who in 1828 remarked, “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”
Behavioral economists and psychologists have tried to understand the source of this penchant for gloominess. One thread of research reasons that overconfidence combined with availability bias may explain this “negativity bias.” Studies find that people in advanced economies tend to think they are in control of their own fortunes and are thus (overly) optimistic about their own lives but are (overly) pessimistic about the wider society. For example, one survey found that Europeans are much more likely to expect their own prospects will improve, while at the same time having low expectations for their country’s future. While overconfidence may lead many people to think they are in control of their own situation, the source of the pessimism toward societal outcomes may come from what psychologists call the “availability bias.”
In the 1970s, psychologist Daniel Kahneman argued that people vastly overestimate the likelihood of events that dominate the news and are thus more available to them. For example, while airplane crashes have become rare—there were no commercial airline crashes worldwide in 2017 despite billions of people traveling—each crash now receives extensive press coverage. Consequently, many people believe airline travel is a very risky mode of transportation.
It is important to recognize that negatively bias may also lead investors astray. Since 1950, the S&P 500 has experienced more positive than negative days (54% vs. 46%); however, large down days receive significantly greater press coverage, and availability bias can result. Such bias causes us to think that while the stock market has risen over many decades, it will no longer do so in the future. But we should question this conclusion just as historian Lord Macaulay suggested almost two centuries ago, “On what principle is it that with nothing but improvement behind us, we are to expect nothing but deterioration before us?” Skeptics would do well to remember that the stock market’s, as well as the world’s, long-term history is encouraging.