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Investing Like an Optimist

Posted in Animal Spirits, Individual Investing

In the May 2005 update of their paper entitled “Optimism and Economic Choice”, Manju Puri and David Robinson use data from the Survey of Consumer Finances (conducted every three years since 1989) to investigate the economic decisions of optimists, including financial portfolio construction. Defining optimism based on the mismatches between the life expectancies estimated by respondents for themselves and those indicated independently by actuarial tables (optimists expect to live longer than indicated actuarially), they find that:

  • Optimists are more likely to be self-employed. They like work more, work harder and plan to retire later (or not at all) than do pessimists.
  • Optimists tend to think that economic conditions will improve over the next five years.
  • Optimists tend to be stock pickers, favoring individual stocks over mutual funds. However, they do not tilt their overall financial portfolios more toward equities than do pessimists.
  • Optimists may be more prone to self-attribution bias than are pessimists.

In summary, stock pickers tend to be optimists who should focus on objectivity in assessing the outcomes of their stock picking.

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