"Projection bias is the tendency to overpredict the degree to which one’s future tastes will resemble one’s current tastes. We test for evidence of projection bias in two of the largest and most important consumer markets – the car and housing markets. Using data for more than forty million vehicle transactions and four million housing purchases, we explore the impact of the weather on purchasing decisions. We find that the choice to purchase a convertible, a 4-wheel drive, or a vehicle that is black in color is highly dependent on the weather at the time of purchase in a way that is inconsistent with classical utility theory. Similarly, we find that the hedonic value that a swimming pool and that central air add to a house is higher when the house goes under contract in the summertime compared to the wintertime.
Our findings are significant for several reasons. First, the car and housing markets in and of themselves are large and important. Identifying, and potentially correcting, systematic errors in these markets can have valuable welfare implications. Perhaps more importantly, our results suggest that projection bias may be prevalent in other important decisions (getting married, choosing a job, etc.) that are similarly distinguished by having large stakes, state-dependent utility, and low-frequency decision-making."
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Our findings are significant for several reasons. First, the car and housing markets in and of themselves are large and important. Identifying, and potentially correcting, systematic errors in these markets can have valuable welfare implications. Perhaps more importantly, our results suggest that projection bias may be prevalent in other important decisions (getting married, choosing a job, etc.) that are similarly distinguished by having large stakes, state-dependent utility, and low-frequency decision-making."
- More Here
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