The defense mechanism illustrated by Jefferson in this scenario is known as rationalization.
The term rationalization is a defense mechanism where individuals create logical or reasonable explanations to justify or make sense of their feelings, thoughts or behaviors especially when they are in conflict with each other
Mr. Jefferson is rationalizing his doubts about his boss's honesty by convincing himself and others that his boss is the best boss he's ever had.
So, in this case, he is trying to reconcile his doubts by rationalizing his boss's behavior as exemplary, even if he has reservations about the boss's honesty.
Therefore, the Option 2 is correct.