Projection Bias in Predicting Future Utility

People exaggerate the degree to which their future tastes will resemble their current tastes. We present evidence from a variety of domains which demon-strates 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 pur-chases of durable goods. We discuss a number of additional applications and implications. The great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another. Avarice over-rates the difference between poverty and riches: ambition, that be-tween a private and a public station: vain-glory, that between obscurity and extensive reputation—Adam Smith, The The-ory of Moral Sentiments [2002, p. 173; III,iii,31].