Contagion of Wishful Thinking in Markets
Management Science 55: 738-751
35 Pages Posted: 16 Nov 2006 Last revised: 9 Jul 2014
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
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