Open AccessTwisting the truth: Foundations of wishful thinking
Author(s) -
Kovach Matthew
Publication year - 2020
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te2744
Subject(s) - status quo , wishful thinking , endowment effect , endowment , axiom , economics , optimism , microeconomics , variety (cybernetics) , positive economics , representation (politics) , mathematical economics , social psychology , psychology , epistemology , computer science , political science , mathematics , artificial intelligence , philosophy , geometry , market economy , politics , law
Considerable evidence shows that people have optimistic beliefs about future outcomes. I present an axiomatic model of wishful thinking (WT), in which an endowed alternative, or status quo, influences the agent's beliefs over states and thus induces such optimism. I introduce a behavioral axiom formalizing WT and derive a representation in which the agent overweights states in which the endowment provides a higher payoff. WT is a novel channel through which an endowment may influence choice behavior and provides a coherent explanation for a variety of observed behavior, including choice reversals among nonstatus quo alternatives when the status quo changes. WT leads to inefficient risk sharing in an exchange economy and has unique implications for the gap between willingness to accept and willingness to pay for endowed goods.