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 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

Budget fallacyBudget fallacy

People tend to underestimate how much it will

take to pay for the project.

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

BudgetBudget fallacy. Case studies fallacy. Case studies

1998 2006

Public TV head office 40 mln zl 190 mln zl

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%

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.

BudgetBudget fallacy. Investigations fallacy. Investigations

Step 2.Actual

Cost overruns

Step 1.Predicted

Financialventure

1. Shopping1. Shopping

Step 1: How much do you intend to spend on shopping?

Step 2: How much did you actually spend?

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

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

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

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?

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

Why we spend more than we plannedWhy we spend more than we planned??

Why do we underestimate our costs?

• Motivation

• Cognitive fallacy

• Instrumentality

Psychophysical compressorPsychophysical compressor

subjective appraisal, Ψ

actual values, Φ

one-to-one reproduction

subadditive,ascending,

concave

Psychophysical compressorPsychophysical compressor

subjective costs, s(€)

actual costs, €

one-to-one estimation

underestimation

Implications for practiseImplications for practise

Everything in the world is much more expensive

than we expect.

The endThe end