The “Budget Fallacy”: Sources of Accuracy and Bias in Personal Spending Predictions (original) (raw)

Bigger Not Better: Unpacking Future Expenses Inflates Spending Predictions

Basic and Applied Social Psychology, 2014

People often underestimate their future personal spending. Across four studies we examined an ''unpacking'' intervention to reduce this bias. Participants predicted spending for an upcoming week (Study 1), a weekend (Study 2a), a vacation (Study 2b), and for weeks versus self-nominated events (Study 3), and subsequently reported actual spending. In each case, unpacking the details of expected expenses increased spending predictions. In contexts where predictions tended to be too low , unpacking eliminated underestimation bias. However, in contexts where predictions were already unbiased, unpacking introduced an overestimation bias (Study 2, 3). Unpacking appears to make predictions bigger, not necessarily better.

Expense Neglect Bias in Forecasting Personal Finances

SSRN Electronic Journal, 2014

This paper shows evidence for expense neglect in how consumers forecast their future spare money or "financial slack." Even though people generally think that both their income and expenses will rise in the future, we find that they systematically under-weigh the extent to which their expected growing expenses will cut into their spare money (Studies 1-9). We rule out the possibility that these findings are due to: measurement error (Studies 2-5); a lack of confidence in estimating future expenses (Study 6); belief in greater flexibility of future expenses (Study 7); or a general optimism bias (Study 8). Study 9 shows that consumers who are chronically attuned to expenses (tightwads) are less likely to show expense neglect than those who are not (spendthrifts). Finally, we conduct a meta-analysis of our entire file-drawer (25 studies, 7,214 participants) and find that across all studies participants place about 2.7 times the weight on income change as they do on expense change when forecasting their financial slack, and that expense neglect is stronger for the distant than near future.

When distance pays off: The role of construal level in spending predictions

Journal of Experimental Social Psychology, 2012

Self predictions are often optimistically biased, even for recurrent events. People could generate more realistic predictions by using information about past experiences, however they tend to disregard this cognitive approach. Drawing on Construal Level Theory, we propose that increases in construal level facilitate the use of information from past experience, and thereby increase prediction accuracy. This proposal was tested in two studies examining predictions of personal spending. Consistent with the hypotheses, individuals induced to construe the prediction target at a higher level of abstraction generated more accurate predictions (Study 1) and the effect of increased construal level on prediction was attributable to a greater reliance on past experience . The findings indicate that high-level construal can sometimes benefit prediction accuracy.

Our Temptation for Benjamins: Can framing spending habits allow us to overcome present bias?

2020

This study will investigate whether people prefer spending their cash on hand for instantaneous benefits, or delay consumption for future returns, and the impact of their mood on their spending habits. Past studies find that one’s state of happiness immensely contributes to his or her willingness to spend money; happier, satisfied individuals tend to spend a lot less than dissatisfied ones. However, few studies focus on the impact of loss aversion on people’s time preferences towards money. The goal of this paper is to measure not only the impact of happiness as the same mood-congruent effect on time preferences but also that of loss aversion using lotteries that are announced in different time periods. Our statistical analysis goes in parallel with the literature on mood change and delaying consumption: those with higher degree of happiness appears to opt for the lottery that is higher compensated and announced in later time period, after accounting for demographic information. Ack...

How Much Will I Spend? Factors Affecting Consumers’ Estimates of Future Expense

Journal of Consumer Psychology, 1997

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On the psychology of self-prediction: Consideration of situational barriers to intended actions

When people predict their future behavior, they tend to place too much weight on their current intentions, which produces an optimistic bias for behaviors associated with currently strong intentions. More realistic self-predictions require greater sensitivity to situational barriers, such as obstacles or competing demands, that may interfere with the translation of current intentions into future behavior. We consider three reasons why people may not adjust sufficiently for such barriers. First, self-predictions may focus exclusively on current intentions, ignoring potential barriers altogether. We test this possibility, in three studies, with manipulations that draw greater attention to barriers. Second, barriers may be discounted in the self-prediction process. We test this possibility by comparing prospective and retrospective ratings of the impact of barriers on the target behavior. Neither possibility was supported in these tests, or in a further test examining whether an optimally weighted statistical model could improve on the accuracy of self-predictions by placing greater weight on anticipated situational barriers. Instead, the evidence supports a third possibility: Even when they acknowledge that situational factors can affect the likelihood of carrying out an intended behavior, people do not adequately moderate the weight placed on their current intentions when predicting their future behavior.

Delay and duration effects of time frames on personal savings estimates and behavior

Organizational Behavior and Human Decision Processes, 2011

We examined effects of time frame duration (a month vs. a year) and delay (next month vs. a specific future month) on personal savings estimates. Results revealed that unitized monthly savings estimates provided for a specific future month were significantly higher than those given for either next month or next year (Experiments 1). An examination of the underlying process revealed that decision makers had greater future optimism when estimating savings for a specific future month (Experiment 2) and thought of the savings task with low-level construal (Experiments 3 and 4) compared to other conditions. However, these decision makers actually saved less money (Experiment 5) after providing the higher estimates. Our findings uncovered the mediating roles of future optimism in the delay effect, and of construal level in the duration effect, on savings estimates, and shed light on how resource slack and temporal construal combined to affect savings estimates.

The Least Likely of Times: How Remembering the Past Biases Forecasts of the Future

Psychological Science, 2005

Atypical events are both memorable and unrepresentative of their class. We tested the hypotheses that (a) people tend to recall atypical instances of events, and (b) when they are unaware of this, they rely on these atypical instances in forecasting their affective reactions to future events. In three studies, participants who were asked to recall an instance of an event and participants who were asked to recall an atypical instance of an event recalled equally atypical instances. However, only the former participants made extreme forecasts about their reactions to future events. The results suggest that the impact bias (the tendency to overestimate the affective impact of future events) may be due in part to people's reliance on highly available but unrepresentative memories of the past.

Planning, personality, and prediction: The role of future focus in optimistic time predictions

Organizational Behavior and Human Decision Processes, 2003

The present studies examined cognitive processes underlying the tendency to underestimate project completion times. Two experiments tested the hypothesis that people generate overly optimistic predictions, in part, because they focus narrowly on their future plans for the target task and thus neglect other useful sources of information. Consistent with the hypothesis, instructing participants to adopt a ''future focus''-in which they generated concrete, specific plans for the task at hand-led them to make more optimistic predictions about when they would complete their intended Christmas shopping (Study 1) and major school assignments (Study 2). The future focus manipulation did not have a corresponding effect on actual completion times, and thus increased the degree of optimistic bias in prediction. The studies also demonstrated that the optimistic prediction bias generalized across different task domains, relevant individual differences (i.e., trait optimism and procrastination), and other contextual variations.