Why we spend more than we planned? The budget fallacy Piotr Gasparski Institute of Psychology, Polish Academy of Sciences Warsaw School of Social Psychology.

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Presentation transcript:

Why we spend more than we planned? The budget fallacy Piotr Gasparski Institute of Psychology, Polish Academy of Sciences Warsaw School of Social Psychology

Planning fallacy People tend to underestimate how long it will take to complete the project. Kahneman D., Tversky A. (1979). Intuitive predictions: biases and corrective procedures. Management Sciences, 12,

Budget fallacy People tend to underestimate how much it will take to pay for the project.

Planning fallacy, psychological investigation 55 days34 dayssemester paper actualpredictedtask Step 1. How long will it take to complete the project? Step 2. Recording actual time of the project. Buehler R., Griffin D., Ross M. (1994). Exploring the "planning fallacy": Why people underestimate their task completion times. JPSP, 67, 3, time

Budget fallacy. Case studies Public TV head office40 mln zl190 mln zl

Budget fallacy. Statistics Inaccuracy of transportation project cost estimates Flyvbjerg B., Holm S. M. K., Buhl S. L. (2002). Underestimating costs in public works Project. Error or lie? Journal of American Planning Association, 68, 3, Project typeN of casesCost overruns Rail5844.7% Fixed-link3333.8% Road % All projects %

Hypothesis The budget fallacy is not limited to mega-projects. It is also present in ordinary personal activities, including shopping, household budget or holiday expenses. People tend to underestimate future expenses.

Budget fallacy. Investigations Step 2. Actual Cost overruns Step 1. Predicted Financial venture

1. Shopping Step 1: How much do you intend to spend on shopping? Step 2: How much did you actually spend?

Budget fallacy. Investigations 65 zl (€ 20) Step 2. Actual 30% 50 zl (€ 15)1. Shopping (N=40) Cost overruns Step 1. Predicted Financial venture

Internet survey (N=80): Step 1. How much do you plan to spend this coming week? Step 2. 7 x how much did you spent today? 2. Weekly household budget

Budget fallacy. Investigations 783 zł (€ 240) 65 zł (€ 20) Step 2. Actual 33% 587 zł (€ 180) 2. Weekly household budget (N=80) 30% 50 zł (€ 15)1. Shopping (N=40) Cost overruns Step 1. Predicted Financial venture

3. Holidays in Croatia Imagine that you are planning a two- week car trip for two to Croatia. You plan to stay at a rented apartment just like the one you can see in the picture. Try to think of all the types of costs. How much do you think the trip is going to cost you?

Budget fallacy. Investigations zł (€ 1370) 783 zł (€ 240) 65 zł (€ 20) Step 2. Actual 40%3 200 zł (€ 970) 3. Holidays in Croatia (N=90) 33% 587 zł (€ 180) 2. Weekly household budget (N=80) 30% 50 zł (€ 15)1. Shopping (N=40) Cost overruns Step 1. Predicted Financial venture

Why we spend more than we planned? Why do we underestimate our costs? Motivation Cognitive fallacy Instrumentality

Psychophysical compressor subjective appraisal, Ψ actual values, Φ one-to-one reproduction subadditive, ascending, concave

Psychophysical compressor subjective costs, s( €) actual costs, € one-to-one estimation underestimation

Implications for practise Everything in the world is much more expensive than we expect.

The end