Wishful Thinking

Andrew Caplin, John V. Leahy

NBER Working Paper No. 25707
Issued in March 2019
NBER Program(s):The Economic Fluctuations and Growth Program, The Monetary Economics Program

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.

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Document Object Identifier (DOI): 10.3386/w25707