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Contagion of Wishful Thinking in Markets

McCombs School of Business, University of Texas at Austin, Austin, Texas 78712
Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853
nick.seybert{at}mccombs.utexas.edu
rjb9{at}cornell.edu

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.

Key Words: wishful thinking; betting; desirability bias; unrealistic optimism; motivated reasoning; contagion; markets; investors; investing; gambling; information aggregation
History: Received: April 9, 2007; accepted: November 19, 2008.