"People in moderately good or positive moods tend to be less
thorough and less vigilant decision-makers, are more subject to
cognitive biases, and rely more on heuristics than people in moderately
"Perhaps the best documented of all psychological errors is
the tendency to be over-optimistic. The finding of consistent over-optimism
results from a number of psychological biases, such as the illusion
of control and self-attribution bias".
and Overconfidence in Asset Allocation Decisions, Benartzi,
Kahneman, and Thaler
"Individual investors tend to be overly optimistic. They tend
to focus more on potential positive returns than possible losses,
and roughly a third of the people we surveyed believe that stocks
are definitely guaranteed to outperform bonds over the long run.
We wonder whether those overly optimistic investors understand the
risk and return profile of their portfolios".
Optimism, Dimson, Marsh and Staunton, 2003
"We address the tendency of many investors to overestimate
the rewards and underestimate the risks of investing in stocks over
the long term - that is, investors' irrational optimism. In particular,
we examine the widely held belief that stocks are a 'safe' investment
for the long run".
Level and Persistence of Growth Rates, Chan,, Karceski and Lakonishok,
"While some firms have grown at high rates historically, they
are relatively rare instances. Specifically, growth forecasts are
overly optimistic and add little predictive power. Valuation ratios
also have limited ability to predict future growth".
Homo Economicus to Homo Sapiens, Thaler, 2000
"We all tend to be optimistic about the future. On the first
day of my MBA class on decision-making at the University of Chicago,
every single student expects to get an above-the-median grade, yet
half are inevitably disappointed. This optimism will induce me to
predict that economics will become more like I want it to be".
and Greed In Financial Markets: A Clinical Study Of Day-Traders,
Lo, repin and Steenbarger, 2005
"Recent research in the cognitive sciences and financial economics
suggest an important link between rationality in decision making
and emotion. We find a clear link between emotional reactivity and
trading performance as measured by normalized profits-and-losses.
Specifically, the survey data indicate that subjects whose emotional
reaction to monetary gains and losses was more intense on both the
positive and negative side exhibited significantly worse trading
performance, implying a negative correlation between successful
trading behavior and emotional reactivity. Also, contrary to common
intuition regarding common personality traits of professional traders,
the psychological traits derived from a standardized personality
inventory survey instrument do not reveal any specific "trader
personality type" in our sample. This raises the possibility
that different personality types may be able to function equally
well as traders after proper instruction and practice".
Mood and Financial Economics, Nofsinger, 2003
"We argue that the general level of optimism/pessimism in society
affects the emotions of most financial decision-makers at the same
time. This creates biased financial decisions that are correlated
evidence on optimism and underreaction in analysts' forecasts,
Espahbodi, Dugar and Tehranian, 1991
"In this paper, we argue that the observed optimism in analysts'
forecasts is related to the costs and benefits to analysts of issuing
optimistic forecasts - when the costs of issuing an optimistic forecast
are high relative to the benefits of doing so, optimism will be
less apparent or absent".