Optimism and Portfolio Choice

Posted: 11 Mar 2010 Last revised: 21 Nov 2016

See all articles by Jiayi Balasuriya

Jiayi Balasuriya

University of Hertfordshire - Business School; City University of London - Sir John Cass Business School

Yaz Gulnur Muradoglu

Queen Mary University of London; City University London - Sir John Cass Business School

Peter Ayton

City University London

Date Written: February 15, 2010

Abstract

This study develops innovative measures of financial optimism by defining optimism as the overestimation of the favourable outcome in an individual’s future financial situation. The paper finds that optimism has a positive influence on an individual’s preference for risky portfolios and a negative impact on her preference for risk-free portfolios when controlled on other demographical and wealth variables. Optimistic individuals borrow more unsecured debt and take on larger mortgages than non-optimistic individuals indicating that optimistic individuals have a higher risk preference for their portfolios. We use more than 660,000 observations from the British Household Panel Survey covering the period 1991 to 2007 in our analysis. We also find that optimists have significantly different demographic characteristics compared to pessimists or neutral respondents. Optimists are significantly younger, more likely to be male, have higher business ownership, borrow more personal debt and take on a larger mortgage than pessimists. They also have lower accumulated financial wealth and home ownership but have a higher average unemployment rate than people who are pessimistic or neutral towards their financial situation. We were able to obtain these findings across individuals in the BHPS with a statistically significant level of confidence. We verified the robustness of the effect of financial optimism by using alternative measures of optimism, repeating the regression analysis only with the individuals who are the head of households as indicated in the BHPS, and using different years of the BHPS between 1995 and 2005. The results from the robustness test support our main findings.

Keywords: Financial Decision Making, Optimism, Individual Investor, Households Behaviour, Portfolio Choice, Debt Choice

JEL Classification: D10

Suggested Citation

Balasuriya, Jiayi and Muradoglu, Yaz Gulnur and Ayton, Peter, Optimism and Portfolio Choice (February 15, 2010). Available at SSRN: https://ssrn.com/abstract=1568908 or http://dx.doi.org/10.2139/ssrn.1568908

Jiayi Balasuriya (Contact Author)

University of Hertfordshire - Business School ( email )

College Lane
Hatfield, Hertfordshire Al10 9AB
United Kingdom

City University of London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Yaz Gulnur Muradoglu

Queen Mary University of London ( email )

Francis Bancroft Building
Mile End Road
London, E1 4NS
United Kingdom

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 0124 (Phone)
+44 20 7040 8853 (Fax)

Peter Ayton

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

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