Saturday, June 4, 2005
Those who practice commercial law are familiar with the fact that business people are almost always too optimistic. This is probably a good thing, because no one would ever launch a new venture if they really understood how difficult it would be.
But emotions play a role in all kinds of economic decisions, for individuals as well as businesses. In a new paper from the National Bureau of Economic Research, Optimism and Economic Choice, by Manju Puri and David Robinson (both Duke Finance), the authors explore the role of optimism:
This paper presents some of the first large-scale survey evidence linking optimism to major economic choices. We create a novel measure of optimism using the Survey of Consumer Finance by comparing a person's self-reported life expectancy to that implied by statistical tables. Optimists are more likely to believe that future economic conditions will improve. Self-employed respondents are more optimistic than regular wage earners. In general, more optimistic people work harder and anticipate longer age-adjusted work careers. They are more likely to remarry, conditional on divorce. In addition, they tilt their investment portfolios more toward individual stocks.