Result on Optimism Biases

Investor Personality Test Result

BIAS REPORT        

Confidence Biases              

Overconfidence : Below Average   

Over-Optimism : Below Average     

               

Optimism: Your result is Below Average

"For myself I am an optimist - it does not seem to be much use being anything else."

~ Sir Winston Churchill, 1954.

Optimism refers to the rose-colored lenses through which high-scorers view the world. Optimism is associated with "confidence" biases because many people who are overly optimistic overestimate their chances of success (as in overconfidence). Yet optimistic people do not typically take excessive risks. They are likely to take calculated, moderate risks. In fact, optimistic people would not want to risk losing a sum of money large enough to depress their mood.

Optimistic people often avoid negative information and seek out evidence confirming their positive outlook. This search for positive confirmation is a type of denial, On the flip-side of optimism is pessimism, which characterizes low-scorers.

As with the other confidence "biases," optimism benefits businesspeople, politicians, and other professionals whose ability to attract business often depends on their attitude. However, in the financial markets, excessive optimism can lead to superficial analysis and denial of important, negative evidence. One potential result of over-optimism is not saving adequately for retirement. One financial planner said: "It's the ornery, suspicious people who save the most for retirement. The happy ones just figure everything will be okay, and when they near retirement, they come to me, and I have to help them ratchet down their expectations."

The optimistic investor may find himself holding excessive risk in his portfolio while denying evidence of growing dangers. Many optimistic investors who believed in the "New Economy" and the outstanding growth potential of internet stocks found themselves over-exposed to the volatile technology sector in late 2000 and 2001. It was common to hear over-optimistic pundits urging investors to “stay the course” (or "dollar-cost average") in their technology stock investments in late 2000 and 2001.

Optimistic people tend to be resilient. Additionally, optimistic people often believe that "everything is going to work out for the best," which fosters energetic activity and success in many areas of life.

HIGH SCORERS:

If you are a high scorer, you are optimistic. You tend to see the glass as "half-full," and you generally see a positive future ahead for you and the world. Your optimism is, in general, a great gift. However, in your investing, you should be careful:

1.         Don't believe the hype. You are more susceptible to believing a good story. Remember, a good company does not make a good stock. Only invest when you can look through the buzz at the underlying fundamental data.

2.         Most investors stop paying attention to risks when things are going well. Because of your higher level of optimism, you are more susceptible to ignoring investment risks during winning streaks than others. Be sure to seriously investigate the potential risks of your investments as often as appropriate.

3.         Budget extra money. Save more than you think you'll need for business projects and retirement. You’re likely to underestimate the money you'll need in retirement, and medical studies show that you're likely to live longer than pessimists.

LOW SCORERS:

"My pessimism extends to the point of even suspecting the sincerity of other pessimists."

~ Jean Rostand (1894 - 1977)

If you are low scorer, you are generally pessimistic. The following pointers may help improve your peace-of-mind and profitability:

1.         Because of your extra attention to negative details, you may avoid investing when you perceive signs of danger, regardless of the opportunities that are present. Try to maintain an awareness of your negative emotions. When you are more negative, it may actually be a good time to look for opportunities and to take some risk. Be aware of this paradox, and consider using a journal to document your mood, the events that affect your mood, and your resulting mood-related decisions, every day.

2.         You may take losses personally. After a series of losses, you may become excessively pessimistic and risk averse. Be aware of these tendencies. When you feel like selling out your riskier positions, revisit your plan. Be sure to review your strategy's historical performance to boost your long-term confidence.

3.         Avoid checking your investment performance, except at predefined intervals. Frequent checking leads to negative emotional reactions (and resulting bad decisions) when positions are going against you (which they often will be).