Projection Bias in Predicting Future Utility

U.C. Berkeley Economics Working Paper E00-284

52 Pages Posted: 6 Nov 2000

See all articles by George Loewenstein

George Loewenstein

Carnegie Mellon University - Department of Social and Decision Sciences

Ted O'Donoghue

Cornell University - Department of Economics

Matthew Rabin

University of California, Berkeley - Department of Economics

Date Written: May 2000

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.

Keywords: Addiction, Consumption, Cooling Off, Misprediction, Projection Bias, Reference Dependence

JEL Classification: A12, B49, D11, D91, E21

Suggested Citation

Loewenstein, George F. and O'Donoghue, Ted and Rabin, Matthew, Projection Bias in Predicting Future Utility (May 2000). U.C. Berkeley Economics Working Paper E00-284. Available at SSRN: https://ssrn.com/abstract=239901 or http://dx.doi.org/10.2139/ssrn.239901

George F. Loewenstein

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States
412-268-8787 (Phone)
412-268-6938 (Fax)

Ted O'Donoghue (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6287 (Phone)
607-255-2818 (Fax)

Matthew Rabin

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

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