Twisting the Truth: Foundations of Wishful Thinking

40 Pages Posted: 15 May 2018 Last revised: 4 Aug 2019

See all articles by Matthew Kovach

Matthew Kovach

Mitchell E. Daniels, Jr School of Business, Purdue University

Date Written: August 1, 2018

Abstract

Considerable evidence shows that people have optimistic beliefs about future out- comes. I present an axiomatic model of wishful thinking (WT), in which an endowed alternative, or status quo, influences the agent’s beliefs over states and thus induces such optimism. I introduce a behavioral axiom formalizing WT and derive a representation in which the agent overweights states in which the endowment provides a higher payoff. WT is a novel channel through which an endowment may influence choice behavior and provides a coherent explanation for a variety of observed behavior, including choice reversals among non-status quo alternatives when the status quo. WT leads to inefficient risk sharing in an exchange economy and has unique implications for the gap between willingness to accept and willingness to pay for endowed goods.

Keywords: Wishful Thinking, Status Quo Bias, Reference Dependence, Belief Distortions, Optimism

JEL Classification: D01, D11, D80, D81, D83

Suggested Citation

Kovach, Matthew, Twisting the Truth: Foundations of Wishful Thinking (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=3171393 or http://dx.doi.org/10.2139/ssrn.3171393

Matthew Kovach (Contact Author)

Mitchell E. Daniels, Jr School of Business, Purdue University ( email )

403 Mitch Daniels Blvd.
West Lafayette, IN 47907
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
137
Abstract Views
763
Rank
426,272
PlumX Metrics