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Projection Bias in Predicting Future Utility

By George Loewenstein and Ted O&apos

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 e¤ect. 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

Topics: Changing Tastes, Dynamic Inconsistency, Impulse Purchases, Intertemporal Choice, Misprediction, Reference Dependence. JEL Classi…cation, A12, B49, D11, D91, E21
Year: 2002
OAI identifier: oai:CiteSeerX.psu:10.1.1.198.4071
Provided by: CiteSeerX
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