How Wishful Thinking Porpagates

The way that a decision maker handles the risks involved in a decision, risk-behavior, could have great impact on the future success or failure of that decsion. Therefore, it is useful to know where this risk-behavior comes from.

Is a decision maker's risk-behavior mostly influenced by the personality of that individual, or is it mostly influenced by the decision making environment?

Saybert and Bloomfield in their article, Contagion of Wishful Thinking in Markets, which appeared in May-2009 issue of the Management Science, show that the interaction of decision makers with each other can impact their risk-behavior. More specifically, they try to show how wishful betting might lead to wishful thinking when decision makers interact with each other.

In one of their experiments, the authors examine the decision making behavior of two groups of individuals who have to make a risky decision (a bet). The first group have access to the objective probabilities. That is, the first group are individuals who know the probability of each possible outcome of their decisions (bets). The experiment results show, although people in this group have unbiased belief about the probabilities of the outcomes, they have a tendency toward making the decisions as if the probability of their favorable outcome is higher than what this probability actually is. This is what they call wishful betting.

This observation can explain the risk-seeking behavior of a decision maker in some cases. The authors then examine the second group who do not have access to the objective probabilities of outcomes, but can observe the decisions of the first group. The results of the experiment show that the second group actually come to believe that the probability of their favorable outcome is higher than what that probability actually is. Hence, they bet accordingly. This is what they call wishful thinking.

I found this research interesting, since it shows how risk-behavior of a decision maker, if observable to others, can impact the risk-behavior of other decision makers.

So, one might naturally ask:

"if we can change the observability of individuals' risk-behavior in an organization, can we influence the risk-behavior of each decision maker?"

A positive answer suggests that, if we want more risk-seeking behaviors in the organization, in an R&D department for example, we should announce publicly any bold move carried out by each researcher. On the other hand, if we want more risk-aversion behaviors, we should cover up any risky decision made by individuals.

What do you think?

UMASS Boston students and faculty can click here to see a PDF version of the paper by Saybert and Bloomfield.