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Wishful Thinking

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  • Andrew Caplin
  • John V. Leahy

Abstract

We model agents who get utility from their beliefs and therefore interpret information optimistically. They may exhibit several biases observed in psychological studies such as optimism, procrastination, confirmation bias, polarization, and the endowment effect. In some formulations, they exhibit these biases even though they are subjectively Bayesian. We argue that wishful thinking can lead to reduced saving, can make possible information-based trade, and can generate asset bubbles.

Suggested Citation

  • Andrew Caplin & John V. Leahy, 2019. "Wishful Thinking," NBER Working Papers 25707, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25707
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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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