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Projection Bias In Predicting Future Utility

  • George Loewenstein
  • Ted O'Donoghue
  • Matthew Rabin

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. We show that, when people exhibit habit formation, projection bias leads people to consume too much early in life, and to decide, as time passes, to consume more-and save less-than originally planned. Projection bias can also lead to misguided purchases of durable goods. We discuss a number of additional applications and implications. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 118 (2003)
Issue (Month): 4 (November)
Pages: 1209-1248

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Handle: RePEc:tpr:qjecon:v:118:y:2003:i:4:p:1209-1248
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