Questions

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?