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Censored Beliefs and Wishful Thinking

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  • Jarrod Burgh
  • Emerson Melo

Abstract

We present a model elucidating wishful thinking, which comprehensively incorporates both the costs and benefits associated with biased beliefs. Our findings reveal that wishful thinking behavior can be characterized as equivalent to superquantile-utility maximization within the domain of threshold beliefs distortion cost functions. By leveraging this equivalence, we establish WT as driving decision-makers to exhibit a preference for choices characterized by skewness and increased risk. Furthermore, we discuss how our framework facilitates the study of optimistic stochastic choice and optimistic risk aversion.

Suggested Citation

  • Jarrod Burgh & Emerson Melo, 2024. "Censored Beliefs and Wishful Thinking," Papers 2402.01892, arXiv.org, revised Jan 2025.
    • Handle: RePEc:arx:papers:2402.01892
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    References listed on IDEAS

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