Financial Decisions: Does Extreme Optimism Help?

New research from Duke University sheds light on the connection between optimism and money matters and being able to make prudent, or wise, financial decisions.

Duke University's Fuqua School of Business professors of finance, Manju Puri and David Robinson, wanted to study the connection, or relationship, between the personality trait of optimism and money matters to determine whether optimism effects prudence in relation to making financial decisions. They developed a unique method for defining optimism and used a unique source for collecting data on optimism.

The Federal Reserve Board conducts a triennial survey to determine U.S. families' financial and demographic standing and status through the Survey of Consumer Finance (SCF). The SCF collects data on demographics--age, ethnicity, education, income, investment and savings--and on health-related issues like the existence of chronic conditions or a family history of such. This is the same information that actuaries collect and use in determining aggregate life expectancy rates, as are pertinent to life insurance underwriting.

The SCF does not ask psychological questions nor personality questions that might be useful in determining optimism. However, it does ask for individual's own assessment of how long they expect to live.

Puri and Robinson used this self-assessment and the actuarial-related data to determine SCF respondents' levels of optimism. They identified two categories: optimists who believe they will live longer than the statistical actuarial data indicates and extreme optimists who are the top 5 percent of optimists and believe they will live 20 years longer than statistics indicate.

The correlations Puri and Robinson found between levels of optimism and financial prudence were striking and covered many significant aspects of routine and long-term money matters and financial decisions.