Sweet Lemons
(co-authored with Alain Cohn and Collin Raymond)
Presenter
Associate Professor of Marketing
Ross School of Business, University of Michigan
Abstract
Modern economic models of choice assume that people derive utility not only from the realization of outcomes, but also from the anticipation of future events. This can lead people to distort beliefs optimistically about future events. In this paper, we examine the notion of such motivated beliefs in a natural high-stakes environment — the COVID-19 pandemic. We conducted a series of surveys that elicited people’s beliefs about the risk of getting infected with the coronavirus. Leveraging exogenous variation in the timing of having to return to work after the initial wave of lockdowns, we find that people hold increasingly optimistic beliefs about the risk of catching the virus as the return date approaches. This pattern suggests that people dynamically distort their beliefs in an attempt to reduce their anxiety about an imminent, potentially negative event. This dynamic belief distortion is more pronounced for risk averse individuals and those who are more likely to get severely ill. We provide a tractable model that accounts for the dynamic and heterogeneous nature of belief distortion.