Unrealistic optimism: what it is and how to deal with it

Unrealistic optimism: what it is and how to deal with it Purpose – Unrealistic optimism is a well‐documented psychological phenomenon. The purpose of this paper is to discuss the meaning of being “unrealistically optimistic”. This bias has important implications in many economic and managerial contexts and the authors present evidence of it. Although the policy and welfare implications of such a widespread phenomenon are vast, they have been largely neglected by policy makers. The authors propose conservative paternalistic measures. Design/methodology/approach – Critical review of existing literature on Unrealistic Optimism. Analyses of some relevant variables of the mortgage and corporate credit markets in Portugal and Spain. Findings – The authors point to evidence and argue that Unrealistic Optimism may well have been at play in the recent behaviour of mortgage and corporate credit markets in Portugal and Spain. Practical implications – Because ignoring such biases may simply lead borrowers and financial institutions down a real road to ruin, it is important to discuss paternalistic policies that may mitigate them. The paper therefore presents a conservative approach to paternalistic measures that policy makers should consider adopting. Originality/value – The paper shows the link between irrational behaviour and mortgage and corporate credit markets in Portugal and Spain and suggests paternalistic policies that should be encouraged. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Research: The Journal of the Iberoamerican Academy of Management Emerald Publishing

Unrealistic optimism: what it is and how to deal with it

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
1536-5433
DOI
10.1108/1536-541211273883
Publisher site
See Article on Publisher Site

Abstract

Purpose – Unrealistic optimism is a well‐documented psychological phenomenon. The purpose of this paper is to discuss the meaning of being “unrealistically optimistic”. This bias has important implications in many economic and managerial contexts and the authors present evidence of it. Although the policy and welfare implications of such a widespread phenomenon are vast, they have been largely neglected by policy makers. The authors propose conservative paternalistic measures. Design/methodology/approach – Critical review of existing literature on Unrealistic Optimism. Analyses of some relevant variables of the mortgage and corporate credit markets in Portugal and Spain. Findings – The authors point to evidence and argue that Unrealistic Optimism may well have been at play in the recent behaviour of mortgage and corporate credit markets in Portugal and Spain. Practical implications – Because ignoring such biases may simply lead borrowers and financial institutions down a real road to ruin, it is important to discuss paternalistic policies that may mitigate them. The paper therefore presents a conservative approach to paternalistic measures that policy makers should consider adopting. Originality/value – The paper shows the link between irrational behaviour and mortgage and corporate credit markets in Portugal and Spain and suggests paternalistic policies that should be encouraged.

Journal

Management Research: The Journal of the Iberoamerican Academy of ManagementEmerald Publishing

Published: Nov 9, 2012

Keywords: Portugal; Spain; Corporate finances; Financial markets; Credit institutions; Unrealistic optimism; Mortgage and corporate credit markets in Portugal/Spain; Paternalistic policies

References

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