IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2402.01892.html

Censored Beliefs and Wishful Thinking

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2402.01892
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ruodu Wang & Ričardas Zitikis, 2021. "An Axiomatic Foundation for the Expected Shortfall," Management Science, INFORMS, vol. 67(3), pages 1413-1429, March.
    2. Manski, Charles F., 1986. "Ordinal Utility Models Of Decision Making Under Uncertainty," SSRI Workshop Series 292682, University of Wisconsin-Madison, Social Systems Research Institute.
    3. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
    4. Michael D. Grubb, 2015. "Overconfident Consumers in the Marketplace," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 9-36, Fall.
    5. Markus K. Brunnermeier & Jonathan A. Parker, 2005. "Optimal Expectations," American Economic Review, American Economic Association, vol. 95(4), pages 1092-1118, September.
    6. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    7. Ulrike Malmendier & Geoffrey Tate, 2015. "Behavioral CEOs: The Role of Managerial Overconfidence," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 37-60, Fall.
    8. Marzena Rostek, 2010. "Quantile Maximization in Decision Theory ," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(1), pages 339-371.
    9. Christopher P. Chambers, 2009. "An Axiomatization Of Quantiles On The Domain Of Distribution Functions," Mathematical Finance, Wiley Blackwell, vol. 19(2), pages 335-342, April.
    10. Emily Oster & Ira Shoulson & E. Ray Dorsey, 2016. "Optimal Expectations and Limited Medical Testing: Evidence from Huntington Disease: Corrigendum," American Economic Review, American Economic Association, vol. 106(6), pages 1562-1565, June.
    11. Roland Bénabou & Jean Tirole, 2016. "Mindful Economics: The Production, Consumption, and Value of Beliefs," Journal of Economic Perspectives, American Economic Association, vol. 30(3), pages 141-164, Summer.
    12. Bresnahan, Timothy F. & Reiss, Peter C., 1991. "Empirical models of discrete games," Journal of Econometrics, Elsevier, vol. 48(1-2), pages 57-81.
    13. Kovach, Matthew, 2020. "Twisting the truth: foundations of wishful thinking," Theoretical Economics, Econometric Society, vol. 15(3), July.
    14. Kent Daniel & David Hirshleifer, 2015. "Overconfident Investors, Predictable Returns, and Excessive Trading," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 61-88, Fall.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Burgh, Jarrod & Melo, Emerson, 2025. "Censored beliefs and wishful thinking," Journal of Mathematical Economics, Elsevier, vol. 121(C).
    2. Jarrod Burgh & Emerson Melo, 2023. "Wishful Thinking is Risky Thinking," Papers 2307.02422, arXiv.org, revised Feb 2024.
    3. Castro, Luciano de & Galvao, Antonio F. & Kim, Jeong Yeol & Montes-Rojas, Gabriel & Olmo, Jose, 2022. "Experiments on portfolio selection: A comparison between quantile preferences and expected utility decision models," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 97(C).
    4. de Castro, Luciano & Galvao, Antonio F. & Noussair, Charles N. & Qiao, Liang, 2022. "Do people maximize quantiles?," Games and Economic Behavior, Elsevier, vol. 132(C), pages 22-40.
    5. Peng Liu & Tiantian Mao & Ruodu Wang, 2024. "Quantiles under ambiguity and risk sharing," Papers 2412.19546, arXiv.org.
    6. Luciano Castro & Antonio F. Galvao, 2022. "Static and dynamic quantile preferences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(2), pages 747-779, April.
    7. Stephen L. Cheung & Lachlan Johnstone, 2025. "True overconfidence, revealed through actions: An experiment," Journal of Risk and Uncertainty, Springer, vol. 70(2), pages 171-199, April.
    8. Bolte, Lukas & Fan, Tony Q., 2024. "Motivated mislearning: The case of correlation neglect," Journal of Economic Behavior & Organization, Elsevier, vol. 217(C), pages 647-663.
    9. Cueva, Carlos & Iturbe-Ormaetxe, Iñigo, 2025. "Motivated beliefs about stock returns," Journal of Banking & Finance, Elsevier, vol. 178(C).
    10. Luciano de Castro & Antonio F. Galvao & Gabriel Montes-Rojas & Jose Olmo, 2022. "Portfolio selection in quantile decision models," Annals of Finance, Springer, vol. 18(2), pages 133-181, June.
    11. Nick Saponara, 2018. "Bayesian optimism," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(2), pages 375-406, August.
    12. Xin Liu & Luciano de Castro & Antonio F. Galvao, 2026. "A Smoothed GMM for Dynamic Quantile Preferences Estimation," Papers 2601.20853, arXiv.org.
    13. Ester Faia & Andreas Fuster & Vincenzo Pezone & Basit Zafar, 2024. "Biases in Information Selection and Processing: Survey Evidence from the Pandemic," The Review of Economics and Statistics, MIT Press, vol. 106(3), pages 829-847, May.
    14. Kops, Christopher & Pasichnichenko, Illia, 2023. "Testing negative value of information and ambiguity aversion," Journal of Economic Theory, Elsevier, vol. 213(C).
    15. Payró, Fernando, 2025. "Mixture-betweenness: Uncertainty and commitment," Journal of Economic Theory, Elsevier, vol. 230(C).
    16. de Castro, Luciano I. & Galvao, Antonio F. & Nunes, Daniel da Siva, 2025. "Dynamic economics with quantile preferences," Theoretical Economics, Econometric Society, vol. 20(1), January.
    17. Yuanying Guan & Zhanyi Jiao & Ruodu Wang, 2022. "A reverse ES (CVaR) optimization formula," Papers 2203.02599, arXiv.org, revised May 2023.
    18. de Castro, Luciano & Galvao, Antonio F. & Kaplan, David M. & Liu, Xin, 2019. "Smoothed GMM for quantile models," Journal of Econometrics, Elsevier, vol. 213(1), pages 121-144.
    19. Lars Peter Hansen, 2017. "Comment on "Survey Measurement of Probabilistic Economic Expectations: Progress and Promise"," NBER Chapters, in: NBER Macroeconomics Annual 2017, volume 32, pages 479-489, National Bureau of Economic Research, Inc.
    20. Yi Shen & Zachary Van Oosten & Ruodu Wang, 2024. "Partial Law Invariance and Risk Measures," Papers 2401.17265, arXiv.org, revised Jun 2025.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2402.01892. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.