  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 felicity from the optimistic
anticipation and the future disappointment from the realisation. 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 portfolio
choice problem, pessimistic investors tend to trade conservatively, however,
they might trade aggressively if they are sophisticated enough to recognise the
biases since low expectation can reduce their fear of loss.
