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Twisting the truth: foundations of wishful thinking

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  • Kovach, Matthew

    (Department of Economics, Virginia Tech)

Abstract

Considerable evidence shows that people have optimistic beliefs about future outcomes. I present an axiomatic model of wishful thinking (WT), in which an endowed alternative, or status quo, influences the agent's beliefs over states and thus induces such optimism. I introduce a behavioral axiom formalizing WT and derive a representation in which the agent overweights states in which the endowment provides a higher payoff. WT is a novel channel through which an endowment may influence choice behavior and provides a coherent explanation for a variety of observed behavior, including choice reversals among non-status quo alternatives when the status quo changes. WT leads to inefficient risk sharing in an exchange economy and has unique implications for the gap between willingness to accept and willingness to pay for endowed goods.

Suggested Citation

  • Kovach, Matthew, 2020. "Twisting the truth: foundations of wishful thinking," Theoretical Economics, Econometric Society, vol. 15(3), July.
    • Handle: RePEc:the:publsh:2744
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    Cited by:

    1. Nick Saponara, 2018. "Bayesian optimism," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(2), pages 375-406, August.
    2. Duarte Gonçalves & Jonathan Libgober & Jack Willis, 2021. "Learning versus Unlearning: An Experiment on Retractions," NBER Working Papers 29512, National Bureau of Economic Research, Inc.
    3. Jarrod Burgh & Emerson Melo, 2023. "Wishful Thinking is Risky Thinking," Papers 2307.02422, arXiv.org, revised Feb 2024.
    4. Martin Bustos, 2024. "Identification with Posterior-Separable Information Costs," Papers 2402.09789, arXiv.org.
    5. Jarrod Burgh & Emerson Melo, 2024. "Censored Beliefs and Wishful Thinking," Papers 2402.01892, arXiv.org.

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    More about this item

    Keywords

    Wishful thinking; status quo bias; reference dependence; belief distortions; optimism;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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