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Wishful Thinking is Risky Thinking

Jarrod Burgh and Emerson Melo

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Abstract: We develop a model of wishful thinking that incorporates the costs and benefits of biased beliefs. We establish the connection between distorted beliefs and risk, revealing how wishful thinking can be understood in terms of risk measures. Our model accommodates extreme beliefs, allowing wishful-thinking decision-makers to assign zero probability to undesirable states and positive probability to otherwise impossible states.

Date: 2023-07, Revised 2024-02
New Economics Papers: this item is included in nep-mic, nep-rmg and nep-upt
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