Wishful Thinking

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.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at "http://www.nber.org/papers/w25707"