Wishful Thinking

Guy Mayraz ()

No 1172, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper presents a model and an experiment, both suggesting that wishful thinking is a pervasive phenomenon that affect decisions large and small. Agents in the model start out with state-dependent payoffs, and behave as if high-payoff states are more likely. Subsequent choices maximize subjective-expected utility given these beliefs. Subjects in the experiment were paid in accordance with the future value of a financial asset. Despite incentives for hedging, subjects gaining from high prices made higher predictions than subjects gaining from low prices. Comparative statics agreed with predictions. In particular, a large bonus for accurate predictions did not result in a smaller bias.

Keywords: wishful thinking; optimism; pessimism; cognitive dissonance (search for similar items in EconPapers)
JEL-codes: D01 D03 D80 D81 D83 D84 G11 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-exp, nep-ger, nep-neu and nep-upt
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http://fbe.unimelb.edu.au/__data/assets/pdf_file/0008/796967/1172.pdf

Related works:
Working Paper: Wishful Thinking (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:1172

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