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Wishful Thinking

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  • Guy Mayraz

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.

Suggested Citation

  • Guy Mayraz, 2011. "Wishful Thinking," CEP Discussion Papers dp1092, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1092
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    References listed on IDEAS

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    Cited by:

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    3. Schwandt, Hannes, 2013. "Unmet aspirations as an explanation for the age u-shape in human wellbeing," LSE Research Online Documents on Economics 51571, London School of Economics and Political Science, LSE Library.
    4. Chen, Si, 2012. "Optimistic versus Pessimistic--Optimal Judgemental Bias with Reference Point," MPRA Paper 50693, University Library of Munich, Germany.

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    More about this item

    Keywords

    Wishful-thinking; optimal expectations; priors and desires; payoff-dependent beliefs; asset prices;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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