The Economic Power -- And Pitfalls -- Of Positive Thinking

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The Economic Power -- And Pitfalls -- Of Positive Thinking

http://www.sciencedaily.com/releases/2007/10/071029172900.htm

People who are optimistic are more likely than others to display

prudent financial behaviors, according to new research from Duke

University's Fuqua School of Business.

But too much optimism can be a problem: people who are extremely

optimistic tend to have short planning horizons and act in ways that

are generally not considered wise.

Manju Puri and , professors of finance at Duke, report

in the October 2007 issue of the Journal of Financial Economics that

the differences between optimists and extreme optimists provide

important insights into the interaction between psychology and

economic and lifestyle choices.

Puri and developed a novel method to assess individuals'

levels of optimism, drawing on data from the Federal Reserve Board's

Survey of Consumer Finance (SCF), a triennial assessment of U.S.

families' financial and demographic information. 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--the same sort of information that actuaries use

to estimate life expectancy.

The Duke researchers combined these data to determine participants'

statistical life expectancies. Then 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.

Puri and also labeled as " extreme optimists " the top 5

percent of optimists, those who think they will live an average of

20 years longer than is statistically likely.

Optimism indeed relates to a large number of behaviors, they found.

In small doses optimism can lead to wise decision making, but

extreme optimists " display financial habits and behavior that are

generally not considered prudent, " the authors wrote.

Puri and find that 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,

and 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, " said Puri.

The findings could lead to useful ways to consider individuals'

investment and career planning decisions, and help people understand

or overcome personality characteristics that can negatively affect

important financial decisions, the authors say.

" Doctors tell us that one or two glasses of red wine a day can be

really healthy, " 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. "