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Wishful Thinking

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  • Guy Mayraz

Abstract

An experiment tested whether and in what circumstances people are more likely to believe an event simply because it makes them better off. Subjects observed a financial asset's historical price chart, and received both an accuracy bonus for predicting the price at some future point, and an unconditional award that was either increasing or decreasing in this price. Despite incentives for hedging, subjects gaining from high prices made significantly higher predictions than those gaining from low prices. The magnitude of the bias was smaller in charts with less subjective uncertainty, but was independent of the amount paid for accurate predictions.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1092.

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Date of creation: Nov 2011
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Handle: RePEc:cep:cepdps:dp1092

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

Keywords: Wishful-thinking; optimal expectations; priors and desires; payoff-dependent beliefs; asset prices;

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References

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  1. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  2. Armantier, Olivier & Treich, Nicolas, 2010. "Eliciting Beliefs: Proper Scoring Rules, Incentives, Stakes and Hedging," TSE Working Papers 10-156, Toulouse School of Economics (TSE).
  3. Mariana Blanco & Dirk Engelmann & Alexander Koch & Hans-Theo Normann, 2010. "Belief elicitation in experiments: is there a hedging problem?," Experimental Economics, Springer, vol. 13(4), pages 412-438, December.
  4. Mullainathan, Sendhil & Washington, Ebonya, 2007. "Sticking with Your Vote: Cognitive Dissonance Voting," Working Papers 14, Yale University, Department of Economics.
  5. Gneiting, Tilmann & Raftery, Adrian E., 2007. "Strictly Proper Scoring Rules, Prediction, and Estimation," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 359-378, March.
  6. Lu�s Santos-Pinto & Joel Sobel, 2005. "A Model of Positive Self-Image in Subjective Assessments," American Economic Review, American Economic Association, vol. 95(5), pages 1386-1402, December.
  7. Loewenstein, George, et al, 1993. "Self-Serving Assessments of Fairness and Pretrial Bargaining," The Journal of Legal Studies, University of Chicago Press, vol. 22(1), pages 135-59, January.
  8. Guy Mayraz, 2011. "Priors and Desires," CEP Discussion Papers dp1047, Centre for Economic Performance, LSE.
  9. Carrillo, Juan D & Mariotti, Thomas, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 529-44, July.
  10. Young Park & Luís Santos-Pinto, 2010. "Overconfidence in tournaments: evidence from the field," Theory and Decision, Springer, vol. 69(1), pages 143-166, July.
  11. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory And Anticipatory Feelings," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 55-79, February.
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Cited by:
  1. Shawn Cole & Martin Kanz & Leora Klapper, 2012. "Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers," Harvard Business School Working Papers 13-002, Harvard Business School.
  2. Si Chen, 2013. "Optimistic versus Pessimistic--Optimal Judgemental Bias with Reference Point," Papers 1310.2964, arXiv.org.
  3. Hannes Schwandt, 2013. "Unmet Aspirations as an Explanation for the Age U-Shape in Human Wellbeing," SOEPpapers on Multidisciplinary Panel Data Research 580, DIW Berlin, The German Socio-Economic Panel (SOEP).
  4. Schwandt, Hannes, 2013. "Unmet Aspirations as an Explanation for the Age U-shape in Human Wellbeing," IZA Discussion Papers 7604, Institute for the Study of Labor (IZA).

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