On March 19, 2003, President George W. Bush announced that the United States was invading Iraq. This followed months of protracted arguments to the American people and to the world that Iraq had a chemical and biological weapons program that was in violation of their 1991 cease-fire agreement with the United States. Iraq had committed several other blatant violations of the cease-fire agreement, including firing on U.S. airmen. Nonetheless, the Bush administration had set as the centerpiece of its argument for invasion the existence of a thriving chemical and biological weapons program that presented a threat to the region.


Perhaps the most memorable of these arguments was given by the U.S. Secretary of State Colin Powell to the U.N. Security Council on February 5, 2003. Here he presented satellite photos of supposed mobile chemical weapons factories and bunkers for storage of chemical weapons, and he presented other intelligence that appeared to provide solid evidence that Iraq was building the capability to threaten stability in the Middle East. At one point he played tapes of Iraqi military communications in which the order is given to “remove the expression ‘nerve agent’ wherever it comes up in wireless communications” just before a U.N. inspection team arrived. The U.S. House of Representatives, several of the leading nations in the world, and the United Nations eventually took the intelligence argument as sufficient to warrant military action.


When the United States invaded, however, no such weapons were ever found. Moreover, the United States found no evidence to suggest that any such weapons had ever been there. Soon after it became clear that no chemical or biological weapons would be found, hundreds of blogs and much political commentary claimed, in fact, that the intelligence before the war conclusively showed that they did not exist. But if it were really so easy to see through the case that was made at the time, how could so many have been so blind? At one point before invasion the director of the Central Intelligence Agency had called the case a “slam-dunk.” How could he have been so certain if the case was as weak as many claim it was?


Our circumstances often influence our judgment. Consider the purchase of a pool table. Those without such amenities in their homes might visit friends who possess one and find great pleasure in playing a few games of nine-ball. These tables can be a large investment, with new tables often costing between $3,000 and $10,000. After visiting friends and playing pool several times, you might convince yourself that the high price tag is worth it. Yet throughout basements in America, thousands of pool tables sit dormant.


After convincing themselves to spend such an amount on a table, many play several times within the first few months and then grow bored by the game. They still continue to pull out the cue sticks when friends are visiting who may be excited to play. But for the most part, the table just takes up a large amount of space and gathers dust. It is difficult to understand why someone would expend such money for so little use. Nonetheless, it appears to be common.


We have a difficult time determining how we will feel or think in other circumstances. This can lead us to make notoriously bad decisions, albeit with conviction. We purchase items we believe we will want in the future, only to abandon the items as useless at a later date. We might also claim that we should have known better. In this chapter we consider projection bias and hindsight bias. Projection bias deals with predicting how we will feel at some future date. Hindsight bias deals with remembering the information that was available for our judgment at some previous date. In both cases we discuss the evidence for such biases and how they may be modeled.


These biases create time-inconsistent preferences. That is, what we believe we will want at some other time disagrees with what we actually want at that time. We disagree with ourselves. The evidence for such disagreements is convincing. Moreover, we tend to display such disagreements about even the most deliberated and weighty issues—including decisions to go to college, get married, or even to go to war. Within the rational decision framework pervasive in economics, it is difficult to reconcile such systematic regret. Psychologists have shed much light on these internal conflicts and how they can occur. Behavioral economic work sheds further light on the potential impacts of such behavior and potentially how to avoid such impacts.

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