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Projection Bias in Predicting Future Utility

  • George Loewenstein

    (Carnegie Mellon University)

  • Ted O'Donoghue

    (Cornell University)

  • Matthew Rabin

    (University of California, Berkeley)

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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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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  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. Ted O'Donoghue & Matthew Rabin, 1997. "Incentives for Procrastinators," Discussion Papers 1181, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  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.
  4. 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.
  5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  6. repec:tpr:qjecon:v:112:y:1997:i:2:p:443-77 is not listed on IDEAS
  7. Oswald, Andrew, 1997. "Happiness and Economic Performance," The Warwick Economics Research Paper Series (TWERPS) 478, University of Warwick, Department of Economics.
  8. David Bowman & Deborah Minehart & Matthew Rabin, 1994. "Loss aversion in a consumption/savings model," International Finance Discussion Papers 492, Board of Governors of the Federal Reserve System (U.S.).
  9. 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.
  10. Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 272-292, March.
  11. repec:tpr:qjecon:v:106:y:1991:i:4:p:1039-61 is not listed on IDEAS
  12. 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.).
  13. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  14. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
  15. 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.
  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. 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.
  18. 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.
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