Expectations with Unrealistic Optimism: An Empirical Application

Humberto Brea, Emili Grifell-Tatje and Luis Orea

No 2012/01, Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG)

Abstract: Several studies claim that people have a tendency to be overoptimistic (Coelho;2010; Lovallo & Kahnenman, 2003). Furthermore, some researchers suggest that optimism could be prevalent in managers as a result of the selection process (Heaton, 2002). Nevertheless, there is very little literature about the subject of optimism and managerial decisions (Coelho, 2010). In this study we present a frontier model of expectations with an optimistic bias based on the adaptive expectation model. In our framework, optimism is considered as a positive random term which skews expectations from a normal forecast based on rational assumptions. We model investment decision based on expectations about key variables such as sales or cash flow. We posit that managers have a skewed viewpoint of reality. An application of the empirical model in the context of the American retail industry is provided. This paper contributes to increasing the literature about unrealistic optimism as well as applying productivity and efficiency techniques in the management field.

Pages: 28
Date: 2012
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.unioviedo.es/oeg/ESP/esp_2012_01.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oeg:wpaper:2012/01

Access Statistics for this paper

More papers in Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG) Departamento de Economía, Facultad de Economía y Empresa, Universidad de Oviedo, Avenida del Cristo, s/n. 33006 Oviedo - SPAIN. Contact information at EDIRC.
Bibliographic data for series maintained by Luis Orea () and David Roibas ().