Bleak Expectations: the Role of Pessimism in Smoking, Hazardous Drinking and Exercise
Abstract: Young people with low "broad" wealth may be more likely to take up hazardous consumption and shun investment in human capital. This could occur directly, through the concavity of utility. But it could also occur indirectly, as low wealth decreases a young person's general expectation of future success. Such pessimism would lower the expected future cost of hazardous consumption and the future expected benefit from investment. Excessive pessimism would cause too much of the former and too little of the latter. These hypotheses are tested for the onset of late-adolescent smoking, hazardous drinking, and lack of exercise using a longitudinal study of youth in New Zealand. We find evidence that most components of 15 year olds' "broad wealth" are correlated with their degree of pessimism as assessed by their parents. We find this pessimism predicts the subsequent onset of smoking and lack of exercise, but not hazardous drinking, once factors such as current wealth, risk preference and discount rate are controlled. We find little evidence of bias in expectations, except that children who experience an adverse event (an accident) are too pessimistic that it will recur.
Economic Keywords: expectations; pessimism; adolescent smoking; drinking; exercise
JEL Classification Codes: I12, I2, D12, D90