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Abstract

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 welfare 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.

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File URL: http://128.118.178.162/eps/get/papers/0012/0012003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series General Economics and Teaching with number 0012003.

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Length: 52 pages
Date of creation: 05 Jan 2001
Date of revision:
Handle: RePEc:wpa:wuwpgt:0012003

Note: 52 pages, Acrobat .pdf
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Web page: http://128.118.178.162

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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

This paper has been announced in the following NEP Reports:

• NEP-ALL-2001-02-14 (All new papers)

References

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1. Loewenstein, George & Adler, Daniel, 1995. "A Bias in the Prediction of Tastes," Economic Journal, Royal Economic Society, vol. 105(431), pages 929-37, July.
2. Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 272-292, March.
3. O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
   
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   • Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
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4. Oswald, A.J., 1997. "Happiness and Economic Performance," Papers 18, Centre for Economic Performance & Institute of Economics.
   
   • Oswald, Andrew J, 1997. "Happiness and Economic Performance," Economic Journal, Royal Economic Society, vol. 107(445), pages 1815-31, November.
   • Oswald, Andrew, 1997. "Happiness and Economic Performance," The Warwick Economics Research Paper Series (TWERPS) 478, University of Warwick, Department of Economics.
5. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
   
   • Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
6. Strahilevitz, Michal A & Loewenstein, George, 1998. " The Effect of Ownership History on the Valuation of Objects," Journal of Consumer Research, University of Chicago Press, vol. 25(3), pages 276-89, December.
7. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
8. Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
   
   • Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
9. Read, Daniel & van Leeuwen, Barbara, 1998. "Predicting Hunger: The Effects of Appetite and Delay on Choice, , , ," Organizational Behavior and Human Decision Processes, Elsevier, vol. 76(2), pages 189-205, November.
10. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 769-816, August.
    
    • Ted O'Donoghue & Matthew Rabin, 1997. "Incentives for Procrastinators," Discussion Papers 1181, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
11. Bowman, David & Minehart, Deborah & Rabin, Matthew, 1999. "Loss aversion in a consumption-savings model," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 155-178, February.
12. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
13. Athanasios Orphanides & David Zervos, 1992. "Rational addiction with learning and regret," Finance and Economics Discussion Series 216, Board of Governors of the Federal Reserve System (U.S.).
    
    • Orphanides, Athanasios & Zervos, David, 1995. "Rational Addiction with Learning and Regret," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 739-58, August.
14. Ryder, Harl E, Jr & Heal, Geoffrey M, 1973. "Optimum Growth with Intertemporally Dependent Preferences," Review of Economic Studies, Wiley Blackwell, vol. 40(1), pages 1-33, January.
15. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
    
    • Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
16. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju.
17. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.

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1. Fallible preferences & universities
   by chris dillow in Stumbling and Mumbling on 2010-10-18 15:04:10

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