Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253443 
Authors: 
Year of Publication: 
2020
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 15 [Issue:] 3 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2020 [Pages:] 989-1022
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
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 non-status 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.
Subjects: 
Wishful thinking
status quo bias
reference dependence
belief distortions
optimism
JEL: 
D01
D11
D80
D81
D83
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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