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Optimistic versus Pessimistic--Optimal Judgemental Bias with Reference Point

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  • Si Chen

Abstract

This paper develops a model of reference-dependent assessment of subjective beliefs in which loss-averse people optimally choose the expectation as the reference point to balance the current felicity from the optimistic anticipation and the future disappointment from the realisation. The choice of over-optimism or over-pessimism depends on the real chance of success and optimistic decision makers prefer receiving early information. In the portfolio choice problem, pessimistic investors tend to trade conservatively, however, they might trade aggressively if they are sophisticated enough to recognise the biases since low expectation can reduce their fear of loss.

Suggested Citation

  • Si Chen, 2013. "Optimistic versus Pessimistic--Optimal Judgemental Bias with Reference Point," Papers 1310.2964, arXiv.org.
  • Handle: RePEc:arx:papers:1310.2964
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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