The Downside of Optimism

Jeanna Bryner

Date: 12 November 2007 Time: 02:28 AM ET

Just the mere thought of money can turn a person selfish, so that he helps others less often and prefers to play alone, according to a study. The concept of money, they suggest, makes a person feel more self-sufficient and thus more apt to stand alone. You might be more self-sufficient, but that doesn?t mean you?ll be happy. A survey of women found that those with higher incomes devoted more time to working, commuting, childcare and shopping, leading to more stress and tension than women pulling in less cash.

Optimism, it turns out, is best in moderation.

People who have a rosy outlook are more likely than others to make prudent financial decisions, but those who are extreme optimists make riskier investments and save less money than others, a new study finds.

Manju Puri and David Robinson, professors of finance at Duke University in Durham, N.C., compared statistical and self-reported life expectancies to determine people's levels of optimism.

Overall, they relied on data on families in the United States, collected in 1995, 1998 and 2001 as part of the Federal Reserve Board’s Survey of Consumer Finances (SCF), which included self-reported life expectancies, health factors and demographics. The SCF typically surveys about 4,500 Americans every three years.

The researchers compared the self-reported life expectancies with statistical ones, grouping participants who expected to live longer than the data predicted as "optimists." Participants who expected to live an average of 20 years longer than is statistically likely were labeled "extreme optimists."

In moderation, optimism can lead to sensible decision making, but extreme optimists “display financial habits and behavior that are generally not considered prudent,” the authors write in the October issue of the Journal of Financial Economics.

The results held across demographic, risk-taking dispositions and health-related issues.

They find that compared with others, optimists:

Work longer hours
Invest in individual stocks
Save more money
Are more likely to pay their credit card balances on time
Believe their income will grow over the next five years
Plan to retire later, or not at all
Are more likely to remarry if divorced

In comparison, extreme optimists:

Work significantly fewer hours
Hold a higher proportion of individual stocks in their portfolios
Are more likely to be day traders
Save less money
Are less likely to pay off their credit card balances on a regular basis
Are more likely to smoke

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

The researchers liken optimism to red wine.

“Doctors tell us that one or two glasses of red wine a day can be really healthy,” Robinson said, “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.”

Further research is needed to tease out reasons why moderate and extreme optimists behave differently, the authors say.