Wishful Thinking

35 Pages Posted: 11 Nov 2011 Last revised: 23 Dec 2011

Guy Mayraz

Department of Economics, University of Melbourne; CIFAR

Date Written: October 25, 2011

Abstract

An experiment tested whether and in what circumstances people are more likely to believe an event simply because it makes them better off. Subjects observed a financial asset's historical price chart, and received both an accuracy bonus for predicting the price at some future point, and an unconditional award that was either increasing or decreasing in this price. Despite incentives for hedging, subjects gaining from high prices made significantly higher predictions than those gaining from low prices. The magnitude of the bias was smaller in charts with less subjective uncertainty, but was independent of the amount paid for accurate predictions.

Keywords: wishful thinking, optimal expectations, priors and desires, payoff-dependent beliefs, asset prices

JEL Classification: D01, D03, D81, D84, G11

Suggested Citation

Mayraz, Guy, Wishful Thinking (October 25, 2011). Available at SSRN: https://ssrn.com/abstract=1955644 or http://dx.doi.org/10.2139/ssrn.1955644

Guy Mayraz (Contact Author)

Department of Economics, University of Melbourne ( email )

Melbourne, 3010
Australia
+61 3 9035 8141 (Phone)

HOME PAGE: http://www.mayraz.com

CIFAR ( email )

180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada

Paper statistics

Downloads
127
Rank
184,638
Abstract Views
1,572