An Experimental Test of Some Economic Theories of Optimism

We contribute to the literature on motivated reasoning with a novel experimental test of two economic theories that respectively predict a positivity bias when (1) the potential material losses due to the bias are relatively small or (2) the cognitive costs of the bias are small enough. In our design, these two accounts predict inflated expectations regarding some future payoff. Contrary to that, the average subject tends to (slightly) underestimate that financial prospect. Although a minority of the subjects overestimate systematically, the size of their errors is rather reduced, and they hardly differ in their personal characteristics from the rest of the subjects. These mechanisms, we conclude, do not appear to fully capture under which circumstances people fall into a positivity bias. Yet (1) seems to be empirically less relevant, in that we observe a similarly limited level of bias irrespectively of its monetary cost