Optimism And Portfolio Choice

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Executive Summary

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. The authors use more than six million observations from the British Household Panel Survey covering the period 1991 to 2007 in the analysis.

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