After the Financial Crisis: Heterogeneity of Consumer Optimism and Investment in Risky Assets

We examined the effects of heterogeneous optimism on risky asset investment in the period following the 2008 financial crisis by distinguishing between the micro and macro levels of individuals’ optimism in data provided by the Survey of Consumer Finances (SCF). The baseline logit model showed that the general measure of optimism, which ignores the heterogeneity of one’s’ beliefs in micro and macro levels of optimism, was associated negatively with stock holdings in the period following the financial crisis. This result is in contrast to the findings of prior studies of household optimism. Using the distinct levels of individuals’ optimism, we found that households that are optimistic only about their future income growth are more likely to have directly held stocks in their financial portfolio, and this effect held continuously during the post-crisis period. However, households that are optimistic only about the future economy are less likely to invest directly in stocks during this period. This opposite effect of macro optimism may offset the positive role of individuals’ optimism on risky asset investment that has been documented in previous literature. Results of multinomial logit models indeed indicated that households that possessed macro optimism held a lower portion of stocks at most.