1. Projection bias causes people to suppose that dialysis
patients have a much lower quality of life than actually
prevails. However, when prompted by researchers
to think about the ways they will adapt their lives to
dialysis, people seem to make much more realistic
assessments. Researchers also find that people several
years after winning the lottery rate their quality of life
about the same as those who through an accident had
become quadriplegic (losing the use of their arms and
legs) at about the same time. Relate this phenomenon
to projection bias. How might projection bias affect
people’s choice to play the lottery? What might this
say about get-rich-quick schemes in general? How might
we think about correcting projection bias in this case?
2. To a large extent, one’s lifestyle and the options
available to one depend on choices made while
relatively young: occupation, place of residence, and
perhaps even long-term relationships. Suppose that for
leisure, people can either choose quiet evenings with
friends, cq, or raucous parties, cp. Suppose that when
young, sy, people strongly prefer raucous parties,
u cp sy = 2, u cq sy =1. Alternatively, when old, so,
people strongly prefer quiet times with friends,
u cp so = 1, u cq so =3. Suppose that Chandra is
choosing between majoring in business finance or
recreation management. Both majors require just as
much time and effort now and offer the same current
opportunities for leisure. However, when old, those
who majored in finance will only be able to engage in
quiet time with friends (raucous parties could get you
fired), whereas those in recreation management will
only have access to raucous parties. Use the simple
projection bias model to discuss what Chandra will
choose. What degree of bias is required before Chandra
chooses to enter recreation management? What advice
might this suggest to students in general?
3. Suppose that Marion is considering smoking the first
cigarette. Marion’s utility of consumption in the current
period is given by equation 11.12, where good c is
cigarettes, good f is all other consumption, γ1 =4,
γ2 = 1, and γ3 =2, and xc, 0 =0. Suppose the price of a
unit of consumption for either good is $1 and that
Marion has $10. Calculate Marion’s optimal consumption
given one future period of choice in which he
has an additional $10. Now suppose that Marion suffers
from simple projection bias. Calculate the consumption
he will choose as a function of α. What
impact will projection bias have on his realized utility?
Formulas in equations 11.13 to 11.22 may be useful in
making these calculations.
4. Researchers have found that people who are hungry
tend to have greater craving for food that is more
indulgent (i.e., high in sugar, fat, and salt). Consider
that you are creating a line of convenience foods—
either snack foods or frozen foods.
(a) Describe the circumstances under which most
people decide to eat convenience foods. What state
are they likely to be in? Given this, what types of
convenience foods are most likely to be eaten?
(b) Consider now that most foods are purchased long
before they are eaten, though most people only
purchase items that they use. In what state are
shoppers more likely to purchase convenience
foods? Does this depend on whether convenience
foods are healthy or indulgent?
(c) Create a simple model of food choice based on
simple projection bias. What food would a seller
choose to sell to maximize profits, and how does
this depend on α?
(d) Describe your strategy for creating a line of convenience
foods. Is there any way to create a successful
line of healthy convenience foods?
5. Employers are constantly training new employees by
using more-experienced employees as instructors.
(a) What challenges might the curse of knowledge
present in the training process? How might you
suggest these challenges could be overcome?
(b) Often new employees are given a short (but
inadequate) training course and then afterward are
given a mentor whom they follow for a brief
period before being allowed to function fully on
their own. Employers tend to use the same mentor
repeatedly rather than using a different one each
time. What might this suggest about the curse of
knowledge and how it could be addressed?