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Projection Bias in Predicting Future Utility

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Author Info
Loewenstein, George (Carnegie Mellon U)
O'Donoghue, Ted (Cornell U)
Rabin, Matthew (U of California, Berkeley)
Abstract

People exaggerate the degree to which their future tastes will resemble their current tastes. We present evidence from a variety of domains which demonstrates the prevalence of such projection bias, develop a formal model of it, and use this model to demonstrate its importance in economic environments. Projection bias leads people to overvalue reference-dependent goods and magnifies the endowment effect. It can cause misguided purchases of durable goods. When there is habit formation, projection bias can lead people to consume too much early in life, and to decide, as time passes, to consume more--and save less--than originally planned.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 02-11.

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Date of creation: Jul 2002
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Handle: RePEc:ecl:corcae:02-11

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Find related papers by JEL classification:
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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  1. Stefano DellaVigna & Ulrike Malmendier, 2004. "Overestimating Self_Control: Evidence from the Health Club Industry," NBER Working Papers 10819, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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