We should totally open a restaurant: How optimism and overconfidence affect beliefs

Wishful thinking, defined as the tendency to over-estimate the probability of high-payoff outcomes, is a widely-documented phenomenon that can affect decision-making across numerous domains, including finance, management, and entrepreneurship. We design an experiment to distinguish and test the relationship between two easily-confounded biases, optimism and overconfidence, both of which can contribute to wishful thinking. We find that optimism and overconfidence are positively correlated at the individual level and that both help to explain wishful thinking. These findings suggest that ignoring optimism results in an upwardly biased estimate of the role of overconfidence in explaining wishful thinking. To illustrate this point, we show that 30% of our observations are misclassified as under- or overconfident if optimism is omitted from the analysis. Our findings have potential implications for the design of information interventions since how agents incorporate information depends on whether the bias is ego-related.