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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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Planning fallacyPlanning 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, 313-327
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Budget fallacyBudget fallacy
People tend to underestimate how much it will
take to pay for the project.
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Planning fallacy, psychological investigationPlanning 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, 366-381.
time
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BudgetBudget fallacy. Case studies fallacy. Case studies
1998 2006
Public TV head office 40 mln zl 190 mln zl
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Budget fallacy. StatisticsBudget 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, 279-295
Project type N of cases Cost overruns
Rail 58 44.7%
Fixed-link 33 33.8%
Road 167 20.4%
All projects 258 27.6%
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HypothesisHypothesis
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.
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BudgetBudget fallacy. Investigations fallacy. Investigations
Step 2.Actual
Cost overruns
Step 1.Predicted
Financialventure
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1. Shopping1. Shopping
Step 1: How much do you intend to spend on shopping?
Step 2: How much did you actually spend?
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BudgetBudget fallacy. Investigations fallacy. Investigations
65 zl (€ 20)
Step 2.Actual
30% 50 zl (€ 15)1. Shopping (N=40)
Cost overruns
Step 1. Predicted
Financialventure
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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 budget2. Weekly household budget
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BudgetBudget fallacy. Investigations 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
Financialventure
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3. Holidays in Croatia3. 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?
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BudgetBudget fallacy. Investigations fallacy. Investigations
4 500 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
Financialventure
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Why we spend more than we plannedWhy we spend more than we planned??
Why do we underestimate our costs?
• Motivation
• Cognitive fallacy
• Instrumentality
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Psychophysical compressorPsychophysical compressor
subjective appraisal, Ψ
actual values, Φ
one-to-one reproduction
subadditive,ascending,
concave
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Psychophysical compressorPsychophysical compressor
subjective costs, s(€)
actual costs, €
one-to-one estimation
underestimation
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Implications for practiseImplications for practise
Everything in the world is much more expensive
than we expect.
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The endThe end