Jun

12

Kim ZIt's notable that many of the wealthiest investors are optimistic. But not all of them are, and certainly pessimism pays well from time to time.

Assuming there is a payoff to optimism, what if Penn's Dr Seligman (optimism can be learned) is wrong, and optimism/pessimism is - like many personality traits - genetically determined and rather immutable? Inherently optimistic investors get the rewards of their fortuitous place in time, when they are fortunate to be placed in times of fortune.

Dr Goulston's recent post about personality types suggests there must be studies on which personalities are suited to trading financial markets, and which not. There are lots of these tests - you can take one (such as  this Myers-Briggs type test) and then ask whether your successes and failures were predetermined.

In any case, haircuts never go out of style, they just change in type (remember the old song by Crosby Stills Nash and Young).

Riz Din adds:

My optimism is partly a function of recent documentaries watched, but it looks to this layman that even if mankind is only equally as clever as they have been in recent years, then the gains to humanity will be breath-taking as the digital revolution becomes all encompassing.

Instead of observing incremental changes in technology lets remind ourselves of the state of the world a just few decades ago. Thinking back, I remember adding a 32k ram extension on to my ZX Spectrum. Today, you can pick up an 8GB portable thumbdrive for under GBP 10. I won't try and calculate the gains that have taken place, but I'm pretty sure that if progress simply continues as is, the world is going to be a very interesting place. As the digital world widens and reaches into other fields such as genetics, and perhaps even energy technologies, these fields will reap the benefits of rapidly increasing processing power and depreciation that ensures wide affordability. I can't wait to see what innovations emerge in coming years.

Esteemed former intern Jan-Petter Janssen (NEPS '06) writes in:

If you define optimism as the tendency to overestimate the probability of favorable outcomes, it is clearly irrational and should be avoided. However, it is a good antidote to another unwanted bias; the propensity to suffer mentally from losses more than you benefit from gains (a  la Kahneman-Tversky.) [The latter may not be irrational, but is clearly not a good way to think for a successful-to-be speculator.]

A (too?) much used tool in finance is to compare the utility you gain from a certain outcome versus the expected utility if you choose to take risk. I will apply this to a social setting all guys have to (or had to for the lucky ones) deal with: Should you ask the most beautiful girl out for a date? A Kahneman-Tversky mindset would suggest no action too often because of the fear of rejection. Optimism has the opposite effect of course.

More generally I believe optimists choose action (i.e. risk) over inaction (i.e. status quo) more often than pessimists. And from my own experiences; it's the losses, humiliations and embarrassments that in retrospect have made me fight back and grow … while much success, although good, sometimes lead to hubris and a personal bubble to burst. The bottom line is that action is usually better than inaction. So triumph of the optimists!

Vic observes:

There has been a most unusual clustering of big minima in the S&P recently. Naturally this clustering has been followed and coterminous with all sorts of negative news. Those who are short have not been reluctant to discuss their positions before the close in interviews. The word "ideal" comes to mind.


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