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An Economic Model of the Planning Fallacy

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  • Markus K. Brunnermeier
  • Filippos Papakonstantinou
  • Jonathan A. Parker

Abstract

People tend to underestimate the work involved in completing tasks and consequently finish tasks later than expected or do an inordinate amount of work right before projects are due. We present a theory in which people underpredict and procrastinate because the ex-ante utility benefits of anticipating that a task will be easy to complete outweigh the average ex-post costs of poor planning. We show that, given a commitment device, people self-impose deadlines that are binding but require less smoothing of work than those chosen by a person with objective beliefs. We test our theory using extant experimental evidence on differences in expectations and behavior. We find that reported beliefs and behavior generally respond as our theory predicts. For example, monetary incentives for accurate prediction ameliorate the planning fallacy while incentives for rapid completion aggravate it.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14228.

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Date of creation: Aug 2008
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Handle: RePEc:nbr:nberwo:14228

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  1. 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.
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Cited by:
  1. Bisin, Alberto & Hyndman, Kyle, 2009. "Procrastination, self-imposed deadlines and other commitment devices," MPRA Paper 16235, University Library of Munich, Germany.

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