PRELIMINARY VERSION

There is an abundant literature in finance on overconfidence, how-ever there exists a different psychological trait well known to financial practitioners and psychologists [see Hilton at al. (2004)] which is opti-mism. This trait has received little attention. Our paper analyses the consequences of optimism and pessimism on financial markets. We develop a general model of optimism/pessimism where M unrealistic informed traders and N realistic informed traders trade a risky asset with competitive market makers. unrealistic traders can (i) misper-ceive the expected returns of the risky asset (scenario 1) or (ii) in addition to the previous can make a judgemental error on both the volatility of the asset returns and the variance of the noise in his/her private signal (scenario 2). We show, in scenario 1, that optimistic traders purchase more or sell smaller quantities whereas pessimistic traders sell more or purchase smaller quantities than if they were re