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Professor Leahy's latest paper studies the economic effects of wishful thinking

April 12, 2019

In a new paper entitled “Wishful Thinking” published by the National Bureau of Economic Research, co-authors Andrew Caplin (a professor of economics at the New York University) and John Leahy from the University of Michigan, analyze the economic impact of “optimism, procrastination, confirmation bias, polarization, and the endowment effect.”

Published in March 2019, the paper contends that “wishful thinking can lead to reduced saving, can make possible information-based trade, and can generate asset bubbles.” A succinct summary of the paper’s findings appeared in Emily Lulz’s April 11, 2019 story for Think Advisor, a website that informs investment and financial advisors of the latest relevant research.

In essence, the paper contends that wishful thinkers are more likely to take risks, which leads to increased spending and reduced savings. Positive media coverage of certain investments opportunities—cryptocurrency, for instance—further bolsters confidence and spending, which “may cause wishful thinkers’ role to grow with time.”

Caplin and Leahy argue, however, that even wishful thinkers must confront the reality that “Wishful thinking…is not magical thinking.” For Caplin and Leahy, “even optimists must admit that the asset is only mildly successful.”

Click here to read the summary on Think Advisor. To read the full paper “Wishful Thinking,” click here.

Professor John Leahy holds a joint appointment between the Ford School of Public Policy and the Department of Economics, and studies the psychological side of consumerism, analyzing individualized, decision-making processes.