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Optimism and Portfolio Choice

This study develops three heuristics to measure financial optimism: financial expectation, a priori optimism, and a posteriori optimism. This paper finds that financial optimism has a significant positive effect on risk taking behaviour. Optimistic investors choose risky portfolios over risk-free portfolios for their investments and have higher personal debt borrowing. We use more than six million observations from the British Household Panel Survey covering the period 1991 to 2007 in our analysis. Optimistic, pessimistic and neural respondents have significantly different demographic characteristics. Optimists are significantly younger, more likely being male, have higher educational qualifications, more likely to have business ownership, borrow more personal debt and take on a larger mortgage than pessimists. However they also have a lower accumulated financial wealth and higher average unemployment rate than people who are pessimistic or neutral towards their financial situation.