Working Paper: NBER ID: w25707
Authors: Andrew Caplin; John V. Leahy
Abstract: We model agents who get utility from their beliefs and therefore interpret information optimistically. They may exhibit several biases observed in psychological studies such as optimism, procrastination, confirmation bias, polarization, and the endowment effect. In some formulations, they exhibit these biases even though they are subjectively Bayesian. We argue that wishful thinking can lead to reduced saving, can make possible information-based trade, and can generate asset bubbles.
Keywords: wishful thinking; expectation formation; psychological biases; economic behavior; asset bubbles
JEL Codes: D84; D91; E03
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wishful thinking (D84) | reduced saving rates (D14) |
| wishful thinking (D84) | information-based trade (D83) |
| wishful thinking (D84) | asset bubbles (G19) |