Censored Beliefs and Wishful Thinking

TL;DR

This paper introduces a model of wishful thinking that links biased beliefs to superquantile-utility maximization, explaining how it influences decision-making, risk preferences, and optimistic choices.

Contribution

It provides a novel theoretical framework connecting wishful thinking with superquantile utility, incorporating costs and benefits of biased beliefs.

Findings

Wishful thinking aligns with superquantile-utility maximization.

It causes a preference for skewed and riskier choices.

Framework enables analysis of optimistic stochastic choice and risk aversion.

Abstract

We present a model elucidating wishful thinking, which comprehensively incorporates both the costs and benefits associated with biased beliefs. Our findings reveal that wishful thinking behavior can be characterized as equivalent to superquantile-utility maximization within the domain of threshold beliefs distortion cost functions. By leveraging this equivalence, we establish WT as driving decision-makers to exhibit a preference for choices characterized by skewness and increased risk. Furthermore, we discuss how our framework facilitates the study of optimistic stochastic choice and optimistic risk aversion.