Projection bias

Projection bias2018-07-05T15:42:42+00:00

In behavioral economics, projection bias refers to people’s assumption that their tastes or preferences will remain the same over time. For example, people may overestimate the positive impact of a career promotion due to an under-appreciation of (hedonic) adaptation, put above-optimal variety in their planning for future consumption (see diversification bias), or underestimate the future selling price of an item by not taking into account the endowment effect. Differences between present and future valuations should be particularly underappreciated for durable goods, where satisfaction levels are likely to fluctuate over time. Finally, consumers’ under-appreciation of habit formation (associated with higher consumption levels over time) may lead to projection bias in planning for the future, such as retirement savings (Loewenstein, O’Donoghue, & Rabin, 2003).

Loewenstein, G., O’Donoghue, T., & Rabin, M. (2003). Projection bias in predicting future utility. Quarterly Journal of Economics, 118(4), 1209-1248.

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