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Economic Theories on Optimism Bias - Dictionary of Arguments

Parisi I 70
Optimism bias/Economic theories/Jolls: In the discussion (...) of debiasing through law, the focus is on scenarios in which optimism bias is thought to produce an overall underestimation of the risk of educational loan default. >Risk perception/Economic theories, >Optimism bias/Bibas, >Bounded rationality/Jolls.
As Schwartz and Wilde (1983(1)), among others, have emphasized, however, not all settings will be characterized by significant risk underestimation as a result of optimism bias. In general, optimism bias is context dependent (Armour and Taylor, 2002)(2). In some circumstances, individuals may overestimate rather than underestimate the risk associated with a particular undertaking. For instance, highly available instances of accident or injury can lead to excessive pessimism—a distortion opposite to the one produced by optimism bias (Schwartz and Wilde, 1983)(1). Another possibility is that overoptimistic consumers may underestimate base-level risk but overestimate the decrease in risk from precautionary steps—potentially creating a positive incentive for firms to undertake such measures (Schwartz, 1988)(3). Still another possibility is that likelihoods of very low probability events will be overestimated, although the empirical evidence here is mixed, with some authors suggesting overestimation of the likelihood of very low probability events (for example, Viscusi and Magat, 1987(4), pp. 90–93) and other authors suggesting underestimation of the likelihood of such events (for example, Kunreuther, 1982)(5). The focus of the discussion here is on cases in which optimism bias is thought to lead to risk underestimation; (...). >Bounded rationality, >Cognitive biases/Economic theories.

1. Schwartz, Alan and Louis L. Wilde (1983). “Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests.” Virginia Law Review 69: 1387–1485.
2. Armor, David A. and Shelley E. Taylor (2002). “When Predictions Fail: The Dilemma of Unrealistic Optimism,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman, eds., Heuristics and Biases: The Psychology of Intuitive Judgment, 334–347. New York: Cambridge University Press..
3. Schwartz, Alan (1988). “Proposals for Products Liability Reform: A Theoretical Synthesis.” Yale Law Journal 97: 353–419.
4. Viscusi, W. Kip and Wesley A. Magat (1987). Learning About Risk: Consumer and Worker Responses to Hazard Information. Cambridge, MA: Harvard University Press.
5. Kunreuther, Howard (1982). “The Economics of Protection Against Low Probability Events,” in Gerardo R. Ungson and Daniel N. Braunstein, eds., Decision Making: An Interdisciplinary Inquiry, 195–215. Boston, MA: Kent Publishing.

Jolls, Christine, „Bounded Rationality, Behavioral Economics, and the Law“. In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University Press.

Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution.
The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.
Economic Theories
Parisi I
Francesco Parisi (Ed)
The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017

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