An agent-based model of rational optimism

Abstract

We prove that, in standard insurance markets, rational agents have an incentive to choose as subjective probabilities those incurring in an optimism bias, since they imply real and objective net gains. Our agent-based model of insurance markets thus clarifies how rational optimism naturally appears and persists in insurance markets, opening up the possibility to explain the optimism bias observed in other environments on the basis of the theory of salient perturbations. Our findings are consistent with the empirical evidence showing a systematic and coherent moderate optimism bias of agents in the assessment of probabilities.