Natural Optimism in Financial Reporting: A State of Mind

SYNOPSIS: The objective of this paper is to cohesively introduce the notion of natural optimism into the accounting literature and to provide insights into the role of natural optimism in financial reporting on the part of firm managers. To accomplish this, we first discuss the research that demonstrates that optimism is the natural state of mind for most people and therefore we posit that firm managers involved in preparing financial statements are likely to exhibit naturally occurring optimism. Second, we identify where natural optimism is most likely to have an impact on financial reporting. Third, we address the challenges involved with mitigating or eliminating natural optimism in financial reporting. Finally, we address the relationship between optimism and two other constructs often found in accounting—namely, overconfidence and motivated reasoning.