Projection Bias in Predicting Future Utility
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.
|Date of creation:||Jul 2002|
|Date of revision:|
|Contact details of provider:|| Postal: 402 Uris Hall, Ithaca, NY 14853|
Phone: (607) 255-9901
Fax: (607) 255-2818
Web page: http://www.arts.cornell.edu/econ/CAE/workingpapers.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
- Oswald, A.J., 1997.
"Happiness and Economic Performance,"
18, Centre for Economic Performance & Institute of Economics.
- Oswald, Andrew, 1997. "Happiness and Economic Performance," The Warwick Economics Research Paper Series (TWERPS) 478, University of Warwick, Department of Economics.
- David Laibson, 1997.
"Golden Eggs and Hyperbolic Discounting,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 112(2), pages 443-478.
- 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.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- 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.
- Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
- 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.).
- 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.
- Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
- Loewenstein, George & Adler, Daniel, 1995. "A Bias in the Prediction of Tastes," Economic Journal, Royal Economic Society, vol. 105(431), pages 929-37, July.
- Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 272-292, March.
- Strahilevitz, Michal A & Loewenstein, George, 1998. " The Effect of Ownership History on the Valuation of Objects," Journal of Consumer Research, Oxford University Press, vol. 25(3), pages 276-89, December.
- Ted O'Donoghue & Matthew Rabin, 1997.
"Incentives for Procrastinators,"
1181, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ecl:corcae:02-11. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.