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Expectations with Unrealistic Optimism: An Empirical Application

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  • Brea, Humberto
  • Grifell-Tatje, Emili
  • Orea, Luis

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.

Suggested Citation

  • Brea, Humberto & Grifell-Tatje, Emili & Orea, Luis, 2012. "Expectations with Unrealistic Optimism: An Empirical Application," Efficiency Series Papers 2012/01, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    • Handle: RePEc:oeg:wpaper:2012/01
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    References listed on IDEAS

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