A novel study of optimistic feeling suggests that moderate optimism is key to making reasonable financial decisions.  However, too much optimism leads to imprudence, said the study by Duke University professors David T. Robinson and Manju Puri.  “This paper suggests that optimism is a bit like red wine: too much is clearly bad, but a little each day can be good for one’s health,” they wrote.  The researchers used an unlikely source to compile an index of optimism among American households—the Federal Reserve’s triennial survey of consumer finance.

Big expectations

They identified optimists and extreme optimists by comparing each person’s estimate of his or her own life expectancy to actuarial average life expectancies.  Those who thought they would live longer than the ages indicated on actuarial tables were pegged as optimists. The 5% most optimistic—some of whom expected to live 20 years past the expected average—were labeled as super optimists.  In general, it appears that some optimism leads to better work and life choices. Optimists are generally harder workers, expect to retire later, are more likely to remarry after divorce, invest more in individual stocks, paid credit card bills more promptly, and saved more, the study found.

Prudent or not?

The most interesting finding related to levels of optimism: a little optimism is a financial asset, while excessive optimism can work against financial success, the researchers said.  “Moderate optimists seem to have prudent financial habits, while extreme optimists do not,” they wrote.  Moderate optimists are more likely to pay off their credit card balances and have long planning horizons. Extreme optimists have shorter horizons and are less likely to save money.

They also found that moderate optimists are more likely to work harder and less likely to be day traders in stocks. However, extreme optimists are more likely to work fewer hours, and hold a larger proportion of individual stocks in their portfolios. Moderate optimists may have better self control: they have more liquid assets, and are less likely to smoke, than are extreme optimists.

 

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.