Featured Research

from universities, journals, and other organizations

Wishful Betting Can Contaminate Financial Markets, Study Shows

Date:
March 11, 2009
Source:
University of Texas at Austin, McCombs School of Business
Summary:
Wishful bettors, those who make overly optimistic investments, will ultimately harm themselves financially, but they can harm entire markets as well, new research shows.

Wishful bettors, those who make overly optimistic investments, will ultimately harm themselves financially, but they can harm entire markets as well, new research shows.

Related Articles


Researchers from The University of Texas at Austin and Cornell University have demonstrated how wishful betting can contaminate beliefs throughout markets, as other market participants infer wishful bettors possess more favorable information than they do. As a consequence, investors who initially held accurate beliefs become overly optimistic about stock values.

"The findings of our studies contradict what many people assume about markets, that wishful thinkers will be identified and disciplined by more sophisticated investors," said Nicholas Seybert, an assistant professor of finance at the McCombs School of Business at The University of Texas at Austin. "Instead, investors fail to recognize the existence of wishful betting even though most of them do it. As a result, wishful thinking can be contagious in financial markets."

Seybert and co-author Robert Bloomfield, a professor of management and accounting at Cornell's Johnson Graduate School of Management, set out to determine whether investors with accurate beliefs about intrinsic stock values would invest in accordance with those beliefs. Bloomfield comments, "Our research sounds a note of caution to those who assume that market prices are always a sound basis for drawing conclusions about fundamentals. Traders in our study observe price movements driven by what Keynes called 'animal spirits,' conclude that those price movements actually reflect news, and end up exacerbating market swings by their own responses. The cure lies in encouraging investors to engage in more fundamental analysis, rather than in outsourcing that analysis to the market."

They set up a computer-based stock market where investors could buy and sell stocks. Experimental stock markets are not new, but Seybert and Bloomfield made a significant modification by recognizing that many investors already hold stakes in the market.

Investors started with a short position in half of the stocks and a long position in the other half. The researchers reasoned that investors in short positions would desire low stock values, while those in long positions would desire high stock values. Despite all investors' initially holding unbiased beliefs about intrinsic stock values, those in short positions sold too many shares and those in long positions purchased too many shares. More surprisingly, investors did not anticipate this wishful betting behavior on the part of others. Even though they themselves purchased or sold too many shares of stock, they believed that other investors' trades were based on fundamental information about intrinsic value. By the end of trade, market prices were too extreme and the average investor appeared to be a "wishful thinker" – holding overly optimistic beliefs about intrinsic value.

Seybert and Bloomfield surmise that this contagion problem could contribute to stock market bubbles as well as other market anomalies. For example, prior studies have shown that employees overinvest in their employers' stock, and that investors prefer stocks of local companies.

"If you are an employee of a company or a resident of a city, you have many reasons to desire that your employer or local companies will be successful," Seybert said. "Our theory suggests that one employee's investment could be viewed as a positive signal of value by other employees. Ultimately, employees might use this information to purchase too many shares of their employer's stock."


Story Source:

The above story is based on materials provided by University of Texas at Austin, McCombs School of Business. Note: Materials may be edited for content and length.


Journal Reference:

  1. Seybert et al. Contagion of Wishful Thinking in Markets. Management Science, 2009; DOI: 10.1287/mnsc.1080.0973

Cite This Page:

University of Texas at Austin, McCombs School of Business. "Wishful Betting Can Contaminate Financial Markets, Study Shows." ScienceDaily. ScienceDaily, 11 March 2009. <www.sciencedaily.com/releases/2009/03/090311131610.htm>.
University of Texas at Austin, McCombs School of Business. (2009, March 11). Wishful Betting Can Contaminate Financial Markets, Study Shows. ScienceDaily. Retrieved March 3, 2015 from www.sciencedaily.com/releases/2009/03/090311131610.htm
University of Texas at Austin, McCombs School of Business. "Wishful Betting Can Contaminate Financial Markets, Study Shows." ScienceDaily. www.sciencedaily.com/releases/2009/03/090311131610.htm (accessed March 3, 2015).

Share This


More From ScienceDaily



More Science & Society News

Tuesday, March 3, 2015

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Doctors Often Give In To Vaccine-Wary Parents

Doctors Often Give In To Vaccine-Wary Parents

Newsy (Mar. 2, 2015) A new survey published in the journal Pediatrics found many doctors are giving in to parents&apos; requests to delay vaccinating their children. Video provided by Newsy
Powered by NewsLook.com
Nurse Who Survived Ebola Virus to File Lawsuit

Nurse Who Survived Ebola Virus to File Lawsuit

AP (Mar. 2, 2015) A lawyer for Nina Pham, the 26-year old nurse who survived after contracted the Ebola virus, says the young woman&apos;s &apos;life has changed forever. &apos; Pham is preparing to file a lawsuit against Texas Health Resources for negligence. (March 2) Video provided by AP
Powered by NewsLook.com
Mobile World Looks to 5G

Mobile World Looks to 5G

Reuters - Business Video Online (Mar. 2, 2015) The wireless industry&apos;s annual conference gets underway in Barcelona with 85,000 executives taking part and numerous new smartphones and watches being launched. As Ivor Bennett reports from the show the race for 5G is one of the key themes. Video provided by Reuters
Powered by NewsLook.com
Texas Nurse Suing Hospital Where She Contracted Ebola

Texas Nurse Suing Hospital Where She Contracted Ebola

Newsy (Mar. 1, 2015) In an exclusive interview, The Dallas Morning News reports nurse Nina Pham is now suing Texas Health Presbyterian after contracting Ebola. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Science & Society

Business & Industry

Education & Learning

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins