Wishful Thinking is Risky Thinking

TL;DR

This paper presents a model linking wishful thinking to risk, showing how biased beliefs can be understood through risk measures and allowing for extreme beliefs like zero or positive probabilities for unlikely events.

Contribution

It introduces a novel model of wishful thinking that incorporates costs, benefits, and extreme beliefs, connecting biased cognition with risk assessment.

Findings

Wishful thinking can be modeled using risk measures.

Extreme beliefs, such as zero or positive probabilities for unlikely events, are accommodated.

The model reveals how biased beliefs influence decision-making under risk.

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.