Contagion of Wishful Thinking in Markets

Management Science 55: 738-751

35 Pages Posted: 16 Nov 2006 Last revised: 9 Jul 2014

See all articles by Nicholas Seybert

Nicholas Seybert

University of Maryland - Department of Accounting & Information Assurance

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: November 21, 2008

Abstract

Prior research provides only weak and controversial evidence that people overestimate the likelihood of desirable events (wishful thinking), but strong evidence that people bet more heavily on those events (wishful betting). Two experiments show that wishful betting contaminates beliefs in financial markets because wishful betters appear to possess more favorable information than they actually do. As a consequence, market interaction exacerbates rather than mitigates wishful thinking. This phenomenon, "contagion of wishful thinking," could be problematic in many settings where people infer others' beliefs from their behavior.

Keywords: behavioral financial, wishful thinking, motivated reasoning, contagion, laboratory markets, experimental economics, behavioral finance, market efficiency, anomalies, overconfidence, desirability bias, unrealistic optimism, markets, investors, investing, information aggregation

Suggested Citation

Seybert, Nicholas and Bloomfield, Robert J., Contagion of Wishful Thinking in Markets (November 21, 2008). Management Science 55: 738-751, Available at SSRN: https://ssrn.com/abstract=945213

Nicholas Seybert

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

Robert J. Bloomfield (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

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