Projection Bias in Predicting Future Utility
AbstractPeople 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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Bibliographic InfoPaper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 02-11.
Date of creation: Jul 2002
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Other versions of this item:
- Loewenstein, George & O'Donoghue, Ted & Rabin, Matthew, 2000. "Projection Bias in Predicting Future Utility," Department of Economics, Working Paper Series qt5qh6142m, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2001. "Projection Bias in Predicting Future Utility," General Economics and Teaching 0012003, EconWPA.
- George Loewenstein, Ted O'Donoghue and Matthew Rabin., 2000. "Projection Bias in Predicting Future Utility," Economics Working Papers E00-284, University of California at Berkeley.
- 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 - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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