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Wishful Thinking is Risky Thinking

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  • Jarrod Burgh
  • Emerson Melo

Abstract

We develop a model of wishful thinking that incorporates the costs and benefits of biased beliefs. We establish the connection between distorted beliefs and risk, revealing how wishful thinking can be understood in terms of risk measures. Our model accommodates extreme beliefs, allowing wishful-thinking decision-makers to assign zero probability to undesirable states and positive probability to otherwise impossible states.

Suggested Citation

  • Jarrod Burgh & Emerson Melo, 2023. "Wishful Thinking is Risky Thinking," Papers 2307.02422, arXiv.org, revised Feb 2024.
    • Handle: RePEc:arx:papers:2307.02422
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