The benefits of positive mental attitude, or PMA, have been known for at least 80 years.

In his 1937 book, Think and Grow Rich, Napoleon Hill emphasized the value of positive thinking as a key contributor to success. Countless authors and speakers have followed in his footsteps.

Maintaining PMA enables a sharper focus on short-term and long-term goals. It increases energy levels and reinforces self-discipline. Best of all, it helps sustain momentum when the path is rocky or times are tough. These factors are vital to success, and a common contributor to failure when missing.

So, it’s no wonder so many elite soldiers and athletes — occupations where consistent performance is paramount, and sometimes life-or-death — swear by the benefits of PMA.

This points to an issue with “The Premortem,” a risk management technique we recently discussed.

The premortem — where you imagine an endeavor failed, and then try to picture what went wrong — is undoubtedly an excellent risk management tool. But focusing on what can go wrong, while helpful and sometimes crucial, is not a great way to generate PMA.

Too much negativity can kill passion and creativity and momentum. With an absence of PMA, performance can suffer.

And yet, in the field of investing especially, we know that risk management is a requirement, and that Pollyanna optimism can be dangerous. So, the question becomes, how to find a balance?

The answer — in terms of finding balance between pessimism and optimism — is “Backcasting,” a planning technique that acts as a counterpart to The Premortem.

Backcasting was described by professional poker player Annie Duke in her outstanding book Thinking in Bets (which is more about life and business strategy than poker).

While the premortem focuses on what could go wrong — by imagining failure and working backwards — the backcasting technique focuses on what could go right, along with the plans to make it happen.

To do a backcast, start with an audacious goal, one that could take months or even years to reach.

Now imagine it is months or years into the future, and the goal has been realized. (Annie Duke suggests picturing the front page of a newspaper, with something like XYZ GOAL ACHIEVED as the bold headline.)

You then ask, “How did it happen?” And you work backwards from the goal to the present day.

As with the premortem, when you backcast, you start by imagining a future state — one that doesn’t yet exist but has the plausible potential to exist. Then you try to reverse engineer the events and factors that brought about that future state.

The backcast supports PMA (positive mental attitude) because, instead of imagining failure as the future state, you are focusing on 100% success.

When doing a backcast, along with the mental image of achieving your goal, you can picture all the good things that come with it: Financial freedom, more time with your family, a slimmer waistline, a cabin on the lake, or whatever the fruits of that goal may be.

It is a backcast, rather than a forecast, because you are working “backwards” rather than forwards.

The distinction is more than clever because, as with the premortem, a backcast forces you to exercise dormant parts of your creative brain in ways that a forecast does not.

When doing a conventional forecast, it is easy to fall into habitual patterns of thinking — to be “mentally lazy” without even realizing it. When we forecast, we tend to rely on mental shortcuts, which further exposes us to all the cognitive biases we share.

With a backcast, we can inoculate against many of the lazy thinking and cognitive bias pitfalls of the conventional forecast simply by putting some real elbow grease into the exercise.

The mental work that it takes to imagine a future state — to really picture it and ponder it and work out the implications, ideally on paper or a whiteboard or in a planning journal of some kind — serves as a kind of creative wake-up call for the subconscious.

Then, too, our default view of the future tends to be distorted by the present. This is another problem with forecasting, which could be described as extrapolation — assuming what happens next from the perspective of what happened today or yesterday, or last week or last month. Sometimes this works, but too often it misses the mark.

As with the premortem technique, backcasting can reveal details that would have otherwise been missed. Imagination not only helps break the bonds of unthinking assumption, it can lead to “ah-ha” type moments through the formation of new connections.

For example, Annie Duke talks about the challenge of Frederick Law Olmsted, the designer of New York City’s famous Central Park.

At the time he designed it, Olmsted had to imagine NYC’s Central Park as it would look when populated with mature trees and foliage of all kinds, even as the present state was barren land. Olmsted had to conjure an image of reality that didn’t yet exist, in order to plan for that image and make it real.

Backcasting and the premortem work on the same fundamental principle. They both involve using creativity and imagination to picture a future state, with a follow-on challenge of working backwards.

So which is more useful: backcasting or the premortem?

It’s a trick question, because the degree of usefulness of one versus the other wholly depends on the situation — and because they ultimately work best in tandem.

Backcasting is a great way to develop positive mental attitude (PMA) by focusing on the success you seek and all the benefits that will flow from it. As you reverse engineer the details of your goal, the steps you need to take will come into sharper focus.

The premortem, as a joint exercise, can then further increase the probability of success. If done right the premortem exercise, which is pessimistic in nature, can even add to PMA. The logic here is that focusing on what can go wrong, and then taking care of the risk, increases the odds of things going right. It gives you confidence that you’ve done what you need to do to make sure that your positive outcome materializes.

For investors, backcasting has yet another significant value. It puts the focus squarely on the factors you control — your own behaviors and actions — as opposed to stuff you can’t control, like where the market is going to go.

You can’t control what markets will do, and you can’t guarantee the outcome of any individual investment. But you can develop a plan for success, and then stick with that plan day in and day out.

Backcasting can really help investors here. By imagining, in full technicolor, your future state as a successful investor, with financial goals realized or well on the way, you can boost your PMA levels, and maintain that optimistic spirit, and reinforce self-discipline habits to stick with the plan you created.

Then, too, reverse engineering your best course of action — as the result of a motivation-inducing backcast — will place a natural emphasis on tools and rules. What tools will you use to manage risk? How will you size positions and track them? How will you carry all of this out?

What rules will you create for yourself, and then follow consistently, to ensure the highest probability of success — not just for any one investment, but for your full body of emergent results, across a whole series of investments over time?

At TradeSmith, we are happy to help with this last part. Our TradeStops software helps you measure and manage your risk, track your investment positions, and rebalance your risk as needed. As an organization and a company, our own backcasting tends to focus on empowering the individual investor with great education, great investment tools, and great software — something that motivates us every single day.

We encourage you to log in to your account today and try this exercise with your portfolio. Imagine where you’d like it to be and what you’d like to accomplish a year from now and then check out how our tools can help you backcast your way to achieving your goals.


Founder, TradeSmith