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The University of British Columbia
University of British Columbia
University of Chicago
Consumer Financial Protection Bureau
Sample size: 1288
Field period: 03/05/2016-06/17/2016
Past research suggests that consumers tend to under-predict their future expenses, a phenomenon we’ve labeled the expense prediction bias. Building on research in cognitive psychology showing that prospection and retrospection differ in terms of content and experience, we theorize and demonstrate that the expense prediction bias is driven in part by temporal asymmetry: a general tendency to mentally represent the future as more typical than the past.
Increasing perceived atypicality of future expenses will increase expense predictions.
Participants were randomly assigned to one of three conditions. In the control condition they were asked to recall and predict their expenses for the past and next week. In the typical condition they were asked to list three reasons why their expenses would be similar to a typical week before making their prediction. In the atypical condition they were asked to list three reasons why their expenses would the different from a typical week before making their prediction.
Number of expenses listed
Amount of each expense listed
Willingness to spend on an optional expense
Willingness to pay for a loan
Intention to save vs. repay debt vs. spend
Expense predictions in the atypical condition were significantly higher than in the control and typical conditions, providing support for our primary hypothesis. Our exploration of downstream consequences of the bias did not reveal any notable results.