The Danger of Wishful Thinking During Challenging Times (aka the Stockdale Paradox)

In 1965 during the Vietnam War, pilot James Stockdale’s plane was shot down. After a brief 30-second descent by parachute, he was captured and held in a brutal prisoner of war camp for 7.5 years.

During his imprisonment, Stockdale’s captors repeatedly tortured him. And in 4 of those 7.5 years, they kept him in solitary confinement in a small (3 x 9 foot), windowless concrete cell with a light bulb on around the clock. And each night during solitary confinement they locked Stockdale’s legs into irons.

Clearly Stockdale lived through an unimaginably challenging experience. But he somehow stayed alive, returned home, and subsequently received the Medal of Honor and became a vice admiral in the Navy.

Unfortunately, some other prisoners did not have the same fate.

In the book Good to Great, Stockdale answered author Jim Collins’ question about who the people were who didn’t make it out of the prison:

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.”

Isn’t that incredible? The optimists didn’t make it out alive because they died of a broken heart.

Jim Collins called this the Stockdale Paradox.

The Stockdale or Optimism Paradox

But isn’t optimism normally helpful?

Stockdale explained again:

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 they might be.”

Stockdale learned the paradox and danger of naive optimism.  It was this unrealistic type of optimism that eventually broke the will of the prisoners who did not survive.

On the other hand, he and the other survivors never lost a realistic optimism. They held on to hope that SOMEDAY they would get out. But they were brutally honest about the difficulties and the likely length of time they would have to endure.

While I hope none of us have to endure the physical brutality experienced by Stockdale, we can apply his lesson of the optimism paradox to our lives and real estate investing.

Realistic Optimism as Investors

As I write this in April 2020, we are all facing health and economic challenges related to the Coronavirus pandemic.  This experience naturally took our emotions on a roller-coaster ride of highs and lows as the reality of the situation set in.

Stockdale’s prisoner experience has a lot to teach us in this situation.

As entrepreneurs and investors, we are natural optimists. We believe in our hearts that the future will be better than in the past. Otherwise, we wouldn’t invest our time, energy, and money!

But beware of the danger of naive optimism.

Whether it’s a Coronavirus outbreak or some other problem in the future, it’s critical to be brutally honest about the reality you face. You need to be a realistic optimist.

What does this mean as an investor?

How to Apply Stockdale’s Lesson to Real Estate Investing

Being a realistic optimist as an investor means you KNOW you can get through economic challenges in the end. But you avoid naively putting on rose-colored glasses in the short-term with attitudes like “everything’s ok” and “this will end soon.”

This type of naive thinking is called wishful thinking. We WANT everything to be ok. And we HOPE this will end soon.

Instead, as a realistic optimist investor, you prepare for the worst-case scenario. You define the nightmare. And through this helpful pessimism, you ready yourself mentally, emotionally, and practically for the challenges ahead.

For example, with the particular challenge of the Coronavirus, a realistic optimist investor might ask herself:

• What if 50% or even 100% of my tenants can’t pay?
• What if this economic challenge lasts 12 months instead of 2?
• How much cash do I need to withstand the storm?
• What if my lenders don’t work with me to defer payments?
• What back-up plans can I try if I don’t have enough cash?

By facing the possibility of these difficulties, you may get a little depressed and scared. That’s natural (and actually a helpful survival response!). But the key is to use that negative energy to force yourself to prepare.

For example, I recommended 5 specific preparations called the Emergency Real Estate Survival Kit.

Some of the preparations in my “survival kit” are specifically related to real estate. But preparation #5 – hope and humility – is more a life philosophy. And that type of life lesson is the final takeaway from the story of James Stockdale.

Play Your Role Well

A few years before James Stockdale was shot down that fateful day in 1965, a teacher gave him a book called Enchiridion by the ancient Stoic philosopher Epictetus. The book’s title means “ready at hand,” and it is basically a handbook with wisdom for life.

During the 30-seconds Stockdale descended with his parachute towards his future captors, he says in his amazing little book Courage Under Fire that he had time for one thought:

Five years down there, at least. I’m leaving the world of technology and entering the world of Epictetus.”

Entering the world of Epictetus meant that the only thing that could help him now was his philosophy. He was about to lose all control over his external reality – likely for 5 years or more. But as difficult as his reality would be, he DID still have control and freedom over one thing – how he interpreted and responded to his fate.

Viktor Frankl, who survived the horrific concentration camps of Nazi Germany in World War II said it this way in Man’s Search For Meaning:

Everything can be taken from a man but one thing: the last of human freedoms – to choose one’s attitude in any given set of circumstances, to choose one’s own way.

The Stoic philosophers of ancient Greece and Rome taught that we’re each given a role in life, like an actor in a play. But we don’t get to choose our specific role. The circumstances of life choose it for you.

James Stockdale and Viktor Frankl would have preferred different roles, I’m sure. But that wasn’t their actual choice. Their choice was simply to play their roles well.  

Stockdale was the senior commanding officer of his group of prisoners, and filling that role admirably became his purpose in life.

Frankl saw opportunities to use his skills as a psychotherapist to help both other prisoners and even the guards.

Both Stockdale and Frankl accepted the horrific reality of their situations without losing hope for the future. And they found meaning and purpose in the challenges they would endure.

The same can happen in our own life and investing challenges.

It won’t be easy. We may even fail in the short-run. But if we maintain a realistic optimism and play our roles well, we can become better human beings as a result.

Have you faced challenges when it helped to be a realistic optimist? And what do you think about the philosophy of Stoicism applied to investing and modern life? I’d love to hear from you in the comments.