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The Economics of Optimism and Pessimism

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  • John D. Hey

Abstract

This paper suggests a way of incorporating the important concepts of optimism and pessimism into the accepted model of decision‐making under uncertainty. We exploit the primitive notion that an optimist is someone who over‐estimates (underestimates) the likelihood of favourable (unfavourable) outcomes. We show that this incorporation enables us to explain several commonly observed apparent violations of Subjective Expected Utility Theory. Several illustrations and economic applications are presented, and we show that attitude to ‘fate’ (as evidenced in optimism and pessimism) is a different dimension of personality than attitude to risk. We conclude by relating our extension of SEU theory to other recent extensions. Dieser Artikel schlägt eine Methode vor, die wichtigen Begriffe Optimismus und Pessimismus in das anerkannte Modell der Entscheidung unter Unsichelicheit zu integrieren. Wir nützen die primitive Idee aus, ein Optimist sei jemand, der die Wahrscheinlichkeit von günstigen (beziehungsweise ungünstigen) Ergebnissen überschätzt (beziehungsweise unterschätzt). Wir zeigen, daß diese Integrierung uns ermöglicht, mehrere allgemein beobachtete scheinbare Verstösse gegen die Subjective Expected Utility Theory zu erklären. Mehrere Beispiele und wirtschaftliche Anwendungen werden vorgelegt, und wir zeigen, daß die Einstellung zum ≪Schicksal≫ (durch Optimismus und Pessimismus bewiesen) eine andere Dimension der Persönlichkeit als die Einstellung zum Risiko ist. Zum Abschluß vergleichen wir unsere mit anderen Erweiterungen der SEU‐Theorie. Cet article suggère un moyen d'intégrer ies concepts importants d'optimisme et de pessimisme d'une façon couramment acceptée de prendre une decision dans l'incertitude. Nous exploitons la notion primitive qu'un optimiste est quelqu'un qui sur‐estime (sous‐estime) la possibilité de résultats favorables (défavorables). Nous démontrons que cette intégration nous permet d'expliquer plusieurs apparentes infractions de Subjective Expected Utility Theory, qui ont été sou vent observées, plusieurs illustrations et applications économiques sont presentées, et nous démontrons que cette attitude vis‐ȩ‐vis du ≪destin≫ (comme prouvée dans l'optimisme et le pessimisme) est une autre dimension de la personnalité que l'attitude vis‐ȩ‐vis du risque. Nous concluons en appliquant cette théorie étendue ȩ d'autres développements résentment découverts de SEU théorie.

Suggested Citation

  • John D. Hey, 1984. "The Economics of Optimism and Pessimism," Kyklos, Wiley Blackwell, vol. 37(2), pages 181-205, May.
    • Handle: RePEc:bla:kyklos:v:37:y:1984:i:2:p:181-205
    DOI: 10.1111/j.1467-6435.1984.tb00748.x
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    Cited by:

    1. Karni, Edi, 1992. "Utility theory with probability-dependent outcome valuation," Journal of Economic Theory, Elsevier, vol. 57(1), pages 111-124.
    2. Malmendier, Ulrike & Tate, Geoffrey, 2008. "Who makes acquisitions? CEO overconfidence and the market's reaction," Journal of Financial Economics, Elsevier, vol. 89(1), pages 20-43, July.
    3. Matthew D. Rablen, 2023. "Loss Aversion, Risk Aversion, and the Shape of the Probability Weighting Function," Working Papers 2023013, The University of Sheffield, Department of Economics.
    4. Thomas Astebro & José Mata & Luis Santos-Pinto, 2009. "Preference for Skew in Lotteries: Evidence from the Laboratory," Cahiers de Recherches Economiques du Département d'économie 09.09, Université de Lausanne, Faculté des HEC, Département d’économie.
    5. Fahd Rehman & Russel J. Cooper, 2023. "Effective GDP: A Cross‐Country Comparison," The World Economy, Wiley Blackwell, vol. 46(3), pages 619-652, March.
    6. Duncan, Steven Scott, 1988. "The relevant forecast of variance of income for marketing decisions under uncertainty," ISU General Staff Papers 198801010800009839, Iowa State University, Department of Economics.
    7. V. I. Yukalov & D. Sornette, 2012. "Quantum decision making by social agents," Papers 1202.4918, arXiv.org, revised Oct 2015.
    8. Miettinen, Topi & Kosfeld, Michael & Fehr, Ernst & Weibull, Jörgen, 2020. "Revealed preferences in a sequential prisoners’ dilemma: A horse-race between six utility functions," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 1-25.
    9. Chaikal Nuryakin & Alistair Munro, 2019. "Experiments on lotteries for shrouded and bundled goods: Investigating the economics of fukubukuro," The Japanese Economic Review, Springer, vol. 70(2), pages 168-188, June.
    10. Dawson, Chris, 2017. "The upside of pessimism − Biased beliefs and the paradox of the contented female worker," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 215-228.
    11. Weinstock, Eyal & Sonsino, Doron, 2014. "Are risk-seekers more optimistic? Non-parametric approach," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 236-251.
    12. Astri Muren, 2012. "Optimistic Behavior When A Decision Bias Is Costly: An Experimental Test," Economic Inquiry, Western Economic Association International, vol. 50(2), pages 463-469, April.
    13. Xiaojun Shi & Hiroshi Tsuji & Shunming Zhang, 2012. "Introducing Heterogeneity of Managers' Attitude into Behavioral Risk Scoring for Software Offshoring," Systems Research and Behavioral Science, Wiley Blackwell, vol. 29(3), pages 299-316, May.
    14. Mark Grinblatt & Matti Keloharju, 2009. "Sensation Seeking, Overconfidence, and Trading Activity," Journal of Finance, American Finance Association, vol. 64(2), pages 549-578, April.
    15. K. Skylar Powell & Eunah Lim & Hidenori Takahashi, 2023. "Chasing ‘Animal spirits’: business expectations, performance feedback, and advertising intensity in Japanese firms," Asian Business & Management, Palgrave Macmillan, vol. 22(3), pages 1035-1064, July.
    16. Hocine, Amine & Kouaissah, Noureddine, 2020. "XOR analytic hierarchy process and its application in the renewable energy sector," Omega, Elsevier, vol. 97(C).
    17. Ravindra Singh & Ajay Dwivedi & Shikha Gupta & Sumanjeet Singh & Seema Singh, 2022. "Elucidating the moderating role of personality traits in probing the linkage between digital entrepreneurship characteristics and perceived opportunities," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 12(1), pages 175-188, December.
    18. Michael Lechner & Friedhelm Pfeiffer & Gert Wagner, 1991. "Die Arbeitsmarkterwartung in der DDR kurz vor der Währungsunion," Discussion Papers of DIW Berlin 22, DIW Berlin, German Institute for Economic Research.
    19. Bengtsson, Ola & Ekeblom, Daniel, 2014. "The Bright but Right View? New Evidence on Entrepreneurial Optimism," Working Papers 2014:1, Lund University, Department of Economics.
    20. Bengtsson, Ola & Ekeblom, Daniel, 2014. "The Bright but Right View? A New Type of Evidence on Entrepreneurial Optimism," Working Paper Series 1008, Research Institute of Industrial Economics.
    21. Giuseppe M Ferro & Didier Sornette, 2020. "Stochastic representation decision theory: How probabilities and values are entangled dual characteristics in cognitive processes," PLOS ONE, Public Library of Science, vol. 15(12), pages 1-26, December.
    22. Ferro, Giuseppe M. & Kovalenko, Tatyana & Sornette, Didier, 2021. "Quantum decision theory augments rank-dependent expected utility and Cumulative Prospect Theory," Journal of Economic Psychology, Elsevier, vol. 86(C).

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