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Unveiling the Budget Fallacy: Why We Spend More Than Planned

Explore the Planning and Budget Fallacies, underestimating project completion time and cost. Investigate personal and project expenses with case studies and investigations. Understand the cognitive biases affecting our cost predictions.

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Unveiling the Budget Fallacy: Why We Spend More Than Planned

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  1. Piotr Gasparski Institute of Psychology, Polish Academy of Sciences Warsaw School of Social Psychology Why we spend more than we planned? The budget fallacy

  2. Planning 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

  3. Budget fallacy People tend to underestimate how much it will take to pay for the project.

  4. Planning fallacy, psychological investigation • Step 1. How long will it take to complete the project? • Step 2. Recording actual time of the project. • time • task • predicted • actual • semester paper • 34 days • 55 days • Buehler R., Griffin D., Ross M. (1994). Exploring the "planning fallacy": • Why people underestimate their task completion times. JPSP, 67, 3, 366-381.

  5. Budget fallacy. Case studies

  6. Budget 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

  7. Hypothesis The budget fallacy is not limited to mega-projects. It is also presentin ordinary personal activities, including shopping, household budget or holiday expenses. People tend to underestimate future expenses.

  8. Budget fallacy. Investigations • Financialventure • Step 1.Predicted • Step 2.Actual • Cost overruns

  9. 1. Shopping • Step 1: How much do you intend to spend on shopping? • Step 2: How much did you actually spend?

  10. Budget fallacy. Investigations • Financialventure • Step 1. Predicted • Step 2.Actual • Cost overruns • 1. Shopping (N=40) • 50 zl (€ 15) • 65 zl (€ 20) • 30%

  11. 2. Weekly household budget • Internet survey (N=80): • Step 1. How much do you plan to spend thiscoming week? • Step 2. 7 x how much did you spent today?

  12. Budget fallacy. Investigations • Financialventure • Step 1.Predicted • Step 2.Actual • Cost overruns • 1. Shopping (N=40) • 50 zł (€ 15) • 65 zł (€ 20) • 30% • 2. Weekly household budget (N=80) • 587 zł (€ 180) • 783 zł (€ 240) • 33%

  13. 3. 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?

  14. Budget fallacy. Investigations • Financialventure • Step 1.Predicted • Step 2.Actual • Cost overruns • 1. Shopping (N=40) • 50 zł (€ 15) • 65 zł (€ 20) • 30% • 2. Weekly household budget (N=80) • 587 zł (€ 180) • 783 zł (€ 240) • 33% • 3. Holidays in Croatia(N=90) • 3 200 zł (€ 970) • 4 500 zł (€ 1370) • 40%

  15. Why we spend more than we planned? Why do we underestimate our costs? • Instrumentality • Motivation • Cognitive fallacy

  16. Psychophysical compressor subjective appraisal, Ψ one-to-one reproduction subadditive, ascending, concave actual values, Φ

  17. Psychophysical compressor subjective costs, s(€) one-to-one estimation underestimation actual costs, €

  18. Implications for practise Everything in the world is much more expensive than we expect.

  19. The end

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