Optimistic versus Pessimistic —Optimal Judgemental Bias with Reference Point

This paper develops a model of reference-dependent assessment of subjective beliefs in which loss-averse people optimally choose the expectation as the reference point to balance the current fe-licity from the optimistic anticipation and the future disappoint-ment from the realization.The choice of over-optimism or over-pessimism depends on the real chance of success and optimistic decision makers prefer receiving early information. In the port-folio choice problem, pessimistic investors tend to trade conserva-tively, however, they might trade aggressively if they are sophis-ticated enough to recognise the biases since low expectation can reduce their fear of loss. Neoclassical economics uses a natural simplification of human behaviour as gov-erned by limitless cognitive ability applied to a handful of perceptible goals and untangled by emotions(Stewart (1998)). One fundamental proposition from this presumption is rational expectation(Muth (1961)) simply declaring that agents