Indian-origin researcher reveals the rewards and pitfalls of optimism

November 14th, 2007 - 3:05 am ICT by admin  
Manju Puri and David Robinson, professors of finance at University’s Fuqua School of Business, say that they have developed a novel method to assess individuals’ levels of optimism. They used data from the Federal Reserve Board’s Survey of Consumer Finance (SCF), a triennial assessment of U.S. families’ financial and demographic information, for the purpose.

Although the SCF does not ask about optimism directly, it does ask respondents how long they expect to live. It also collects demographics, and health-related information similar to the one that actuaries use to estimate life expectancy.

The researchers combined the data to determine participants’ statistical life expectancies. Thereafter, they compared the statistical and self-reported life expectancies, and categorized anyone who expected to live longer than the data predicted as an optimist.

“Most of the information we needed was already there, but we had to create a new way of combining it with other existing data in order to extract meaning about optimism,” Puri said.

The researchers labelled the top five per cent of optimists, who thought that they would live an average of 20 years longer than what was suggested by the statistics, as “extreme optimists”.

They found that optimism indeed related to a large number of behaviours.

According to them, while optimism can lead to wise decision-making, extreme optimists “display financial habits and behaviour that are generally not considered prudent.”

“The differences between optimists and extreme optimists are remarkable, and suggest that over-optimism, like overconfidence, may in fact lead to behaviours that are unwise,” said Puri.

The study’s authors said that the new findings could lead to useful ways to consider individuals’ investment and career planning decisions, and help people understand or overcome personality characteristics that could negatively affect important financial decisions.

“Doctors tell us that one or two glasses of red wine a day can be really healthy. But no one tells you to drink the whole bottle. It’s the same with optimism. A little bit is really beneficial, but too much can lead to some really bad economic choices,” Robinson said.

The study has been published in the Journal of Financial Economics. (ANI)

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