Doctor of Philosophy (PhD)
Faculty of Science
In everyday life, people frequently estimate their spending for projects and time periods. In the present research, I extend previous work on self prediction into the realm of personal financial behavior. Seven studies examine people’s ability to predict their future personal spending and processes underlying spending predictions. I found that people tended to underestimate their future personal spending when predicting next week's spending (Studies 1-3), predicting that they would spend substantially less money during an upcoming week than they actually did. On average, participants underestimated their weekly expenditures by about 27&. However, spending predictions for concrete events appeared to be exempt from the optimistic bias: participants were remarkably accurate in predicting their spending across a wide variety of concrete future purchases such as Birthday shopping and other self-nominated events (Studies 5-7). One source of bias in weekly spending predictions is people’s savings goals—defined as the general desire to save money or minimize future spending—at the time of prediction. Participants who reported stronger savings goals (Studies 2, 3, 6, and 7) or were induced experimentally to experience stronger savings goals (Study 4) predicted they would spend less money in a future week. Because savings goals were not related significantly to participants’ actual spending they contributed to prediction bias. Somewhat ironically, then, the very individuals who were more motivated to regulate their future personal spending were also most inclined to generate unrealistic spending predictions. Notably, savings goals were not correlated with predicted spending for a concrete future event. This disconnect between goals and prediction might contribute to the accuracy of event spending predictions. The final study revealed that weekly spending predictions could be de-biased by instructing forecasters to consider the individual spending events associated with the future week prior to making a spending prediction. This cognitive strategy reduced reliance on savings goals during prediction and eliminated the prediction bias for weekly spending predictions. In conclusion, the accuracy of personal spending predictions depends on the prediction target and on existing goals associated with the prediction.
Peetz, Johanna, "The “Budget Fallacy”: Sources of Accuracy and Bias in Personal Spending Predictions" (2010). Theses and Dissertations (Comprehensive). 1101.