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Optimistic versus Pessimistic--Optimal Judgemental Bias with Reference Point

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  • Chen, Si

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 realization.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

  • Chen, Si, 2012. "Optimistic versus Pessimistic--Optimal Judgemental Bias with Reference Point," MPRA Paper 50693, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50693
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimisitic; Pessimistic; Optimal Expectation; Subjective Beliefs; Reference Dependent Portfolio Choice; Information Timing Preference;

    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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