Contagion of Wishful Thinking in Markets

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 laboratory 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.wishful thinking, betting, desirability bias, unrealistic optimism, motivated reasoning, contagion, markets, investors, investing, gambling, information aggregation

Individual risk tolerance and herding behaviors in financial forecasts

“…While Asch, Festinger, Turner, and Shiller explained herding as a phenomenon that can be seen as (bounded) rational and, in fact, optimal if one considers non‐economic social goals, recent experimental studies have suggested explanations that can be considered suboptimal. These explanations have been argued to result from cognitive biases, causing the information value of consensus to be weighted too heavily (Libby & Rennekamp, ; Seybert & Bloomfield, ). Some studies have further sought to explain herding with reference to emotions, leading to heuristics (see, e.g., De Bondt, , who touches upon this idea in the context of financial analysts’ herding behavior).…”

The Balanced Scorecard as a Strategy-Evaluation Tool: The Effects of Implementation Involvement and a Causal-Chain Focus

“…These studies suggest the motivation to arrive at clients' preferred conclusions is one of the reasons "why good accountants do bad audits" (Bazerman et al 2002). Additional studies have demonstrated this bias also persists among analysts (Hunton and McEwen 1997), investors (Hales 2006;Seybert and Bloomfield 2009;Thayer 2009), and management accountants (Boiney et al 1997;Bloomfield and Luft 2006).…”

Project managers’ overconfidence: how is risk reflected in anticipated project success?

“…Anticipation of success is prone to biases linked to the desirability of the outcome (Seybert and Bloomfield 2009;Vosgerau 2010;Windschitl et al 2010) or to perceived but non-existent control over the outcome (Goodman and Irwin 2006;Langer and Roth 1975). At the same time, information supporting desirable outcomes is perceived to be more credible than information supporting undesirable outcomes (Barber et al 2009;Gordon et al 2005).…”