Contagion of Wishful Thinking in Markets

Authors:
Nicholas Seybert;Robert Bloomfield
Affiliations:
McCombs School of Business, University of Texas at Austin, Austin, Texas 78712;Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853
Venue:
Management Science
Year:
2009

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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.