Irrational Exuberance, Entrepreneurial Finance and Public Policy

Marta Coelho, David de Meza and Diane Reyniers

Asia-Pacific Financial Markets, 2004, vol. 11, issue 4, pages 391-417

Abstract: Unrealistic optimism is a well documented phenomenon. This paper argues that it is important in many economic contexts. Focusing on start-up finance for businesses, optimism may be responsible for or consistent with features such as credit rationing or redlining that are normally taken as symptoms of under-provision of finance requiring intervention to expand lending. Optimism leads to the opposite conclusion, at least if it is legitimate to use fiscal policy to counteract systematic error. The paper reports on an experiment in which, due to optimism, the lower the prizes to entrepreneurial activity the higher the subject's expected income. Copyright Kluwer Academic Publishers 2004

Keywords: unrealistic optimism; finance; policy; experiments (search for similar items in EconPapers)
Date: 2004
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