Projection Bias in Predicting Future Utility

George Loewenstein, Ted O'Donoghue and Matthew Rabin

The Quarterly Journal of Economics, 2003, vol. 118, issue 4, 1209-1248

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. 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.

Date: 2003
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Working Paper: Projection Bias in Predicting Future Utility (2002)
Working Paper: Projection Bias in Predicting Future Utility (2000)
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