Censored Beliefs and Wishful Thinking
arXiv:2402.01892
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.
This paper, previously circulated under the title "Wishful Thinking is Risky Thinking: A Statistical-Distance Based Approach,'' has been divided into two separate and complementary works: "Wishful Thinking is Risky Thinking" [arXiv:2307.02422] and "Censored Beliefs and Wishful Thinking."