Confronting Your Financial Reality is the First Step to Improving It

There’s no difference between a pessimist who says, ‘Oh, it’s hopeless, so don’t bother doing anything,” and an optimist who says, “Don’t bother doing anything, it’s going to turn out fine anyway.”  Either way nothing happens.

-Yvon Choiuinard, rock climber, environmentalist, and founder of the outdoor clothing company Patagonia    

Admiral James Stockdale was the highest ranking military officer captured by the North Vietnamese during the Vietnam War.  He was captured early in the conflict and was held as a prisoner of war (POW) from 1968 to 1974.  As the highest ranking official in captivity he became the leader of the POWs and he did what he could in the midst of unthinkable circumstances to help them survive.

In an interview with James C. Collins, author of the fantastic book Good to Great, Collins asked Stockdale how he was able to cope with the unimaginable horrors of being a POW in Vietmam.  Stockdale replied:

I never lost faith in the end of the story.  I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.

Collins then asked Stockdale what the prisoners were like who didn’t make it through.  Stockdale responded:

Oh, that’s easy, the optimists.  Oh, they were the ones who said, “We’re going to be out by Christmas.”  And Christmas would come, and Christmas would go.  Then they’d say, “We’re going to be out by Easter.”  And Easter would come, and Easter would go.  And then Thanksgiving, and then it would be Christmas again.  And they died of a broken heart.

Collins was a bit confused by this as Stockdale’s first comment seemed to credit his optimism for getting him through the ordeal, but his second comment said the optimists were the ones who didn’t make it, so Collins asked for clarification.  Stockdale responded:

This is a very important lesson.  You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever that might be.       

Collins labeled this “The Stockdale Paradox” and summarized it as follows:

You must retain faith that you will prevail in the end, regardless of difficulties.

And at the same time…

You must confront the most brutal facts of your current reality, whatever they might be. 

This combination of facing the facts of your current situation, combined with faith in the ultimate outcome, creates a tension in you that demands action and leads to solutions.

Obviously this principle has many applications, but one of them is in the area of personal finance.  We can’t expect to improve our financial situations by being too pessimistic, giving up hope, and doing nothing; or by being too optimistic, believing everything will work out, and doing nothing.  In order to improve we need to start by facing the facts of where we are now, and then working to come up with solutions to make things better.  In the world of personal finance the way to “face the brutal facts of your current reality” is by preparing a Net Worth Statement.  We will discuss how to do this in the next post.         

Are you an optimist or a pessimist when it comes to your finances?  Do you tend towards despair, which leads you to do nothing, or unfounded optimism, which also leads you to do nothing?  Or are you one of the few who maintain faith in a better future while also facing the facts of your current reality?  If so, has this led you to create a plan to make things better?  I would love to get everyone’s thoughts on the topic.