Optimism is not all good. But it’s not all bad either. Professional investors are confronted on a daily basis and are perhaps more acutely aware than most people that the world is uncertain. Jack Gray, strategist at the big quant manager GMO in Boston and Sydney, says: “You hear people say the markets are uncertain – they’ll wait until there’s more certainty. But it is intrinsic to capital markets that they are uncertain; if they weren’t uncertain you wouldn’t get higher returns. “[Uncertainty] is not going to fade and disappear at some stage, it’s intrinsic. In fact when it begins fade and disappear, as we’ve seen in the last five years with the great moderation where everything looked good, people take more risk and it leads to instability.

It is known as the instability of stability – it comes when everything has looked good and optimistic for too long.” Inalytics, a UK-based research consultancy, claims that the difference between outperforming and underperforming mangers resides not only in their skill, but in their susceptibility to behavioural biases such as optimism. Amanda Field, managing director at Inalytics in Australia, says that even underperforming managers have skill; it’s just that they succumb to behavioural traps to a larger degree than their more successful colleagues. In a study of 41 equity portfolio managers, Inalytics found that most managers had strong buying skills, adding an average of 47bps a year, but because of poor selling, the average portfolio was negatively impacted by an average of 94bps a year.

The firm reckons that because fund managers are typically optimistic, they have a tendency to focus on buying rather than selling. While it is true equities are more likely to rise in value than fall over the long term, by ignoring stocks that underperform, managers undermine the growth of their portfolios. Field says that to be a good seller, you have to be pessimistic. “Out of 300 portfolios we studied, only a handful of managers were good at both buying and selling,” she says. In a research report, Rick Di Mascio, chief executive officer at Inaytics, says good sellers are a rare breed, tending to be cynical and pessimistic. “They tend not to ‘fit’ [within organisations], but those with the ability to sell are highly valuable members of any investment team.”

The overabundance of optimism Daniel Kahneman, a psychologist who won the Nobel Prize for economics in 2002, says that people tend to be highly optimistic most of the time because of cognitive biases – errors in the way the mind processes information. Kahneman’s Prospect Theory offers an explanation for the phenomenon observed in the Inalytics research. His experiments have demonstrated that people tend to be concerned with the marginal impact of each investment decision, and feel the negative impact of a loss twice as much as the positive affect of a win.