Projection Bias in Predicting Future Utility
AbstractJEL#: A12, B49, D11, D91, E21 Keywords: Addiction, consumption, cooling off, misprediction, projection bias, reference dependence People underappreciate how their own behavior and exogenous factors affect their future utility, and thus exaggerate the degree to which their future preferences resemble their current preferences. We present evidence which demonstrates the prevalence of such projection bias, and develop a formal model that draws out both descriptive and wlefare implications of the bias. The model helps interpret established behavioral anomalies such as the endowment effect, and helps to explain commonly observed suboptimal patterns of behavior such as addiction and excessive pursuit of a high material standard of living. The model also suggests potentially welfare-improving policies, such as mandatory "cooling-off periods" for certain types of consumer decisions. June 2000
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Bibliographic InfoPaper provided by University of California at Berkeley in its series Economics Working Papers with number E00-284.
Date of creation: 01 Jun 2000
Date of revision:
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Postal: University of California at Berkeley, Berkeley, CA USA
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Other versions of this item:
- Loewenstein, George & O'Donoghue, Ted & Rabin, Matthew, 2002. "Projection Bias in Predicting Future Utility," Working Papers 02-11, Cornell University, Center for Analytic Economics.
- George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2001. "Projection Bias in Predicting Future Utility," General Economics and Teaching 0012003, EconWPA.
- 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.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-08-15 (All new papers)
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