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Projection Bias in Predicting Future Utility

Author

Listed:
  • Loewenstein, George

    (Carnegie Mellon U)

  • O'Donoghue, Ted

    (Cornell U)

  • Rabin, Matthew

    (U of California, Berkeley)

Abstract

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. 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.

Suggested Citation

  • Loewenstein, George & O'Donoghue, Ted & Rabin, Matthew, 2002. "Projection Bias in Predicting Future Utility," Working Papers 02-11, Cornell University, Center for Analytic Economics.
    • Handle: RePEc:ecl:corcae:02-11
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    File URL: https://www.cmu.edu/dietrich/sds/docs/loewenstein/projectionbias.pdf
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    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 - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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