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

Coelho, Marta (2012) Unrealistic optimism: what it is and how to deal with it. Management Research: the Journal of the Iberoamerican Academy of Management, 10 (3). pp. 226-238. ISSN 1536-5433

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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. Professor Daniel Kahneman references this paper in his recently published book “Thinking, Fast and Slow” (London : Allen Lane, 2011).

Item Type: Article
Official URL: http://www.emeraldinsight.com/journals.htm?issn=15...
Additional Information: © 2012 Emerald Group Publishing
Library of Congress subject classification: B Philosophy. Psychology. Religion > BF Psychology
H Social Sciences > HG Finance
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 23 Nov 2012 16:33
URL: http://eprints.lse.ac.uk/47527/

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