Monday, 12 May 2008

Optimism, fund managers and DC choices

Thinking through this question of optimism a bit more, I'm sure it will have some relevance in pensions policy, but I'll get on to that a bit later. In explaining the difference between an optimistic and pessimistic explanatory style, Seligman identifies three types of charectistics used to view a given situation - permanence, pervasiveness and personalisation. Optimists and pessimists divide in their assessment of each of these.

For example in relation to permanence, an optimist will see a bad situation as temporary ('I'm really tired today') whilst a pessimist will tend to see it as a permanent trend ('I have no energy'). Looking at pervasiveness, an optimist will again see a bad experience as specific ('This book is a waste of time') whereas pessimists will tend to a universal interpretation ('Books are a waste of time'). And finally with respect to personalisation, the optimist will blame bad events on external factors ('I have no luck at poker') whereas the pessimist will internalise the problem ('I am no good at poker').

In addition each of these trends can be seen working in reverse too. So again on the personalisation point, an optimist will see a positive event as resulting from their involvement, whereas the pessimist sees it as resulting from external factors.

So far so interesting. But what struck me is how much this reminded me of the recent Lucy Kellaway column I raved about. I bet if you studied the fund manager who thinks active management is a myth and the respondent who says he knows it is possible because he has outperformed you would get very different scores on an optimism/pessimism test. We don't know if the guy who wrote the letter out or underperformed, but we know the respondent who did outperform thinks it is because of his own skill - an optimistic explanatory style.

Looking more broadly, I bet if we tested the small minority of individuals who choose to make active investment decisions in DC schemes they would tend to be optimists - convinced both of the value of changing from the default, and of their own skill in making investment decisions. It might also be the case that this applies in other decisions - whether to change electricity supplier etc.

Notably the point of Seligman's book is that we can train ourselves to develop an optimistic approach. He argues that that will benefit us both in our personal lives (more enjoyment, improved health) and work (improved performance). I wonder if also affects our ability to make financial decisions?

One final bit. He also makes the point that pessimism has its place - for example sometimes we need to acknowledge blame rather than seeking to externalise it. But what is really interesting/depressing (depending on your optimistic/pessimistic nature no doubt...) is the finding that pessimists tend to be more realistic, and to make more accurate assessments.

I'm not even halfway through the book yet, so I'm sure I'll be posting more as I go along. Definitely worth a read from what I can tell so far.

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