How to be a Smart Consumer: Understanding Projection Bias
Purchasing goods by their ability to provide consistent reward is an essential skill for every smart consumer. In an age of planned obsolescence and rapid product turnover, people must be able to predict whether or not their goods will continue . However, projection bias deters consumers from purchasing “smart.” This is the assumption that your tastes and preferences will not change over time, and that the future utility of a consumed good is fixed. The direction of projection bias leans towards the same direction as current utility. Meaning, the consumer assumes that their satisfaction with the good will not decrease after the time of purchase. Looking at studies involving consumption, projection bias tends to increase our spending in ways that are not favorable.
Projection bias explains a part of the well known adage “Money can’t buy happiness.” This saying refers to the idea that people’s current wants and needs will not help them sustain happiness in the long term. Durable goods, such as cars or technology, only increase happiness in the short term. When we satisfy our need for a good, our mood takes a short, sharp, and dramatic turn in a positive direction. Peeling the plastic off of a new cell phone or smelling the inside of a brand new car induces feelings of gratification and happiness. According to Loewenstein, Donoghue, and Rabin, people who have won the lottery are not that much happier than people who haven’t won the lottery, and people who have not won the lottery are not much happier than people who have lost limbs. This feeling of happiness after winning the lottery or sadness after losing a limb lasts for a much shorter time period than expected. People assume because they are happy immediately upon purchase of something new that these feelings will last, but this is the projection of our current feelings onto the future. Smart consumers recognize their feelings of happiness after a purchase are impermanent, and may be inclined to spend their money more wisely.
Another example of how projection bias affects our daily choices is the experience of shopping while hungry. A study proved that we buy more calorie dense foods while hungry (de-Magistris, Gracia). A consumer assumes that their current feeling of hunger will persist into the future, regardless of the fact that this feeling will subside after they eat. However, a person who is not hungry while food shopping is less likely to purchase unintended food. This discrepancy in food shopping habits is due to projection bias. Someone who is hungry while food shopping assumes the reward of eating junk food will be higher and last longer than a person who is not hungry. The effect of projection bias is so strong, that some studies show that a hungry person is willing to pay a higher price for food than a person who is satiated (de-Magistris, Gracia). Recognizing the strength of projection bias and its implications on how much shoppers will spend can lead consumers to making better spending choices. To be a smart consumer, recognize that feelings can be fleeting.
In addition to feelings of hunger, weather is another factor that contributes to unnecessary spending due to projection bias. In the Northern Hemisphere, convertible sales increase during the warmer months. Having looked at variables such as:
Whether or not a car buyer purposely waited for a nice day to purchase a car
If the consumer planed on purchasing a convertible right away
Whether or not the consumer learned the value of a convertible the day they took the car out for a test drive
Consumers were still most likely to purchase a convertible on warm, sunny days. The predicted use of a convertible seems greater on sunny days despite people knowing that cold and rainy days exist. Becoming a smarter consumer involves thinking towards the future, and not allowing feelings of instant gratification to cloud your judgement.
Conversely, good weather does not always lead to an increase in consumption. In a small college in the midwest, researchers found that students were more likely to attend the school if there was cloudy weather on the day of their visit (Simonsohn). Perhaps students were more likely to enroll because the cloudy weather indicated that the school was more focused on academics because there weren’t as many students participating in recreational activities outdoors. By proving that good weather does not always have a positive correlation with consumption, this study emphasizes that projection bias is not about the external factors that lead consumers to misinterpret immediate utility, but rather how and why consumers misinterpret the longevity of these factors.
Accounting for mood, hunger levels, and weather, consumers should rethink purchasing new products. Understanding projection bias allows the consumer to think towards the future and decide whether or not a product or decision will really have use. A smart consumer knows whether or a not a product will continue to make them happy long-term, and will adjust their spending habits accordingly.
Busse, M. R., Pope, D. G., Pope, J. C., & Silva-Risso, J. (2015). The psychological effect of weather on car purchases. Quarterly Journal of Economics, 130(1), 371-414. [qju033]. DOI: 10.1093/qje/qju033
Chevalier and Goolsbee, "Are Durable Goods Consumers Forward-Looking? Evidence from College Textbooks," Quarterly Journal of Economics 124(4) (November 2009), pp. 1853-1884
de-Magistris T, Gracia A (2016) Assessing Projection Bias in Consumers’ Food Preferences. PLoS ONE 11(2): e0146308. https://doi.org/10.1371/journal.pone.0146308
Loewenstein, G., O'Donoghue, T., & Rabin, M. (2000). Projection Bias in Predicting Future Utility. UC Berkeley: Department of Economics, UCB. Retrieved from https://escholarship.org/uc/item/5qh6142m
Nisbett, R. and D. Kanouse. 1968. “Obesity, Hunger, and Supermarket Shopping Behavior.” Paper presented at the 76th Annual Convention of the American Psychological Association, San Francisco, CA.
Simonsohn, "Weather to go to College," Economic Journal 120(543) (March 2010), pp. 270-280