New HouseIt is important to be able to think clearly about the future. We often make big plans now that affect us for years to come. For example, when you contemplate buying a house, you are making a guess about your future income over the next 30 years. There are many positive things that can happen in your financial future. You might get a big raise, or develop a fantastic new invention that brings you fame and fortune. Of course, there are lots of negative things that can happen. You could lose your job, or get sick, or be the victim of a crime. So good long-term decision making requires you to do a reasonable job of predicting what will happen.

Unfortunately, there is good reason to think that people make some systematic mistakes predicting their future. One that is particularly important is that people mis-predict how likely something is to happen based on whether it is a positive or a negative event. People typically overestimate how likely it is that a positive event will occur and to underestimate how likely it is that a negative event will occur. So, when buying a house, you are likely to feel more confident than you should that your financial future is rosy. You will underplay the chances that some calamity will happen that will hurt your ability to make house payments.

A paper by Heather Lench in the May, 2009 issue of the Journal of Experimental Psychology: General explores this tendency. She points out that many previous studies have simply asked people about how likely it is that various positive and negative events will occur to them, and they find that people are overly optimistic about the likelihood that a positive event will occur in the future and not pessimistic enough about negative events. However, there are lots of reasons why this might occur. It is possible that people tend to find things more desirable when they are more likely to happen rather than the reverse. In addition, many truly negative events are less likely to happen than positive events. For example, most people will experience getting a raise at work in their lives, but many fewer people will lose their job unexpectedly. So, it is possible that people just have trouble thinking about the possibility that an unlikely event will happen to them.

White carTo explore this issue experimentally, Lench manipulated people's feelings toward an object using the evaluative conditioning procedure I described in the blog entry I like you, because I always feel good around you and I don't know why. She showed people a number of images rapidly. One of the images-a white car-was paired frequently either with a positive image (like a puppy) or a negative image (like a snarling dog). The white car was chosen, because most people did not have a strong feeling about it when seeing it alone. Pairing the car with positive images increased people's positive feelings about it. Pairing the car with negative images increased people's negative feelings about it.

Later in the study, people were asked a series of questions that they were told were unrelated to the series of pictures they saw. They were asked to judge the likelihood that a number of events would occur to them in their life. Among the events they judged was the likelihood that they would own a white car. People who saw the white car paired with positive images thought it was more likely that they would own a white car at some point in their lives than people who saw the white car paired with negative images. Another study in this paper observed the same effect by pairing the word "relative" either with positive or negative images and asking people later how likely it would be that they would work for a relative some day.

These results suggest that people really do overestimate how likely it will be that positive events will occur and underestimate the possibility that negative events will occur.

So what does this mean for you? When you are in a situation in which you are planning for the future, it is important to think realistically about how likely it is that positive and negative events will occur. That is hard to do for yourself, and so you should try to get some help from people who can be more objective about your life. To return to the home-buying example, financial professionals make two recommendations for people. First, housing costs should be less than 30% of someone's yearly income. Second, people should aim to have at least 4-6 months' salary in savings to cover expenses in case something bad happens. These recommendations are designed to protect people from the negative events that they assume will not happen to them.

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