Are You Treating Future You As a Stranger? How Projection Bias Is Working In Your Finances

Episode Description: You bought a ski pass in January and never used it. You signed up for a meal kit service when you were very hungry. You took out a 30-year mortgage on a house you'd "definitely" live in forever. What's the common thread? Projection bias — the very human tendency to assume that whoever we are right now is basically who we'll always be. In this episode, we break down what projection bias actually is, why your brain is wired for it, and — most importantly — how to catch yourself doing it before it costs you money.

What You'll Learn:

• What projection bias is and why it's not just "bad planning"
• The three financial zones where it hits hardest: big purchases, savings, and lifestyle creep
• The "Future You Letter" technique and other practical hacks to outsmart your present-biased brain
• Why marketers love projection bias (and use it against you constantly)

Key Concepts Mentioned:

• Projection bias (Loewenstein, O'Donoghue & Rabin, 2003)
• Affective forecasting
• Hyperbolic discounting
• The "hot-cold empathy gap"
• Lifestyle creep / hedonic adaptation

Resources:

• Misbehaving by Richard Thaler
• Stumbling on Happiness by Daniel Gilbert
• The Psychology of Money by Morgan Housel
• Loewenstein, O'Donoghue & Rabin (2003), "Projection Bias in Predicting Future Utility" — Quarterly Journal of Economics

Transcript

Intro and Personal Story

What Is Projection Bias?

Our Survival Machine

3 Areas Where Projection Bias Shows Up

How Marketers Use This Against You

3 Tools To Deal With Projection Bias

Let's Bring This Home!

SPEAKER_00 0:05

Hi everyone, welcome to Personal Finance with Molly, where we talk about all things personal finance. I am your host, Molly Ford Coates. Let's dig in. Okay, guys, real talk. Raise your hand. Unless you're driving, then don't. But raise your hand if you have ever bought something while hungry, cold, excited, or stressed, and then afterward deeply and profoundly regretted it. Yeah, all of us. Every single one of us. And on that note, welcome back to the show. I am so glad you're here because today we are talking about a behavioral finance bias that you will see absolutely everywhere in your financial life. It's called projection bias. And it is sneaky and it's universal, and it has almost certainly cost you money. Here's a quick personal story before we dive in. Every now and then I buy some sort of exercise equipment, usually weights or resistance band or something else that's small. However, I even bought a treadmill this last year. Told myself I would use it, like all the time. Do you know how many times I've actually used it? I don't think it was even a handful of times. It definitely hasn't been more than 10. Now here's the thing. I wasn't being irrational in the moment. Wanting to get into shape, you know, lose a few pounds. I genuinely believed I would be using it all the time. After all, it is right here in my house. I don't even have to go anywhere. The problem was that motivated me, had absolutely no idea how unmotivated me was going to feel about waking up extra early or going to bed a little later or even using it during the day. Hello, doing some exercises while watching TV. Future me had opinions. Present me didn't consult. That is projection bias in action, and that's what we're talking about today. Let's dig in. So, what is projection bias technically? The term was formalized in a really influential 2003 paper by economists George Lowenstein, Ted Donahue, and Matthew Raven. And if you're a nerdy behavioral finance fan like me, that paper is genuinely a joy to read. Their core finding was this. People systematically overestimate the degree to which their future preferences will resemble their current preferences. Let's read that again. Their core finding was that people systematically overestimate the degree to which their future preferences will resemble their current preferences. We systematically, meaning consistently, not randomly, we systematically overestimate how much our future selves will want what our present selves want. If you buy a ski pass in January, you're motivated. And you're cold. You're cold right now, so you overestimate how much you'll value warmth in July. You're enthusiastic about a new hobby today, so you overestimate how much you'll care about it in six months. You're in love with a neighborhood when you tour the house on a beautiful Saturday afternoon, so you assume you'll still love it during your 45-minute commute in a February rainstorm. This isn't the same as just bad planning. Bad planning is forgetting to account for variables. Projection bias is something deeper, and it's your brain using your current emotional and physical state as a template for all future states. And it does this automatically. You're not choosing to do it, your brain is just doing it. Psychologist Daniel Gilbert, who's the author of Stumbling on Happiness, calls this effective forecasting failure. We are genuinely bad at predicting how we'll feel in the future. And the current moment is the single biggest source of contamination in those predictions. Now, why does our brain do this? Because your brain is at its core, your brain is a survival machine running on ancient hardware. And for most of human history, your present state was really important information. If you were cold, that meant cold was a real and present threat worth prioritizing. If you were hungry, food was urgent. The idea of planning for a future emotional state that you can't currently feel, that's a weirdly modern cognitive demand. Lowenstein also talks about what he calls the hot-cold empathy gap, which is one of the most poetic terms in behavioral economics, I think. The idea is that when you're in a hot state, meaning emotionally activated or hungry or excited or scared or in love or whatever, you genuinely cannot fully empathize with your future cold self, and vice versa. When you're calm and satiated, you underestimate how powerfully hunger or excitement or fear will affect your future decisions. And this shows up, friends, in a ton of research. One famous study had participants who had just eaten rate how appealing various foods would be to them in the future. They consistently underrated them, because right now, well, I'm full, so food doesn't seem that important. Meanwhile, participants who hadn't eaten overrated how appealing those foods would be. Because I'm hungry, so obviously food will always seem this important. Same principle, same bias, but friends, huge financial consequences. Alright, so let's get into the money stuff because this is where it gets really interesting. I see projection bias doing damage in three main areas of personal finance. So let me walk you through each one, and then of course we'll deal with that we'll talk about how to deal with it, right? So three areas, three tools. Area one are big purchases. This is the ski pass problem scaled up, and it shows up most dramatically in real estate, in cars, and in subscription services. So let's talk about real estate first. When you're shopping for a house, you typically see it on a weekend, probably when it's been cleaned up and staged. You're excited, you're optimistic, you're imagining dinner parties in that kitchen. And here's the thing: that emotional state causes you to project forward. You assume that future you will feel this excited about the house. You don't fully account for the commute at rush hour or the noise from the highway you didn't notice on a Sunday afternoon, or the fact that your priorities might completely shift when you have kids or change jobs or your parents need care. The National Association of Realtors actually has data showing that a significant portion of homeowners report regretting their purchase within the first two years. Projection bias is a major driver of that. You bought based on present state enthusiasm and assumed it was a permanent feature of your relationship with that house. Same thing with cars. You buy the truck because you imagine a version of yourself who hauls things and goes off-road and lives adventurously. The reality is most truck owners drive to work and drive to the grocery store. The off-road version of themselves was a projection, a vivid and very sincere and expensive projection. Subscription services are the small-scale version of this trap. You sign up in a moment of high motivation, like New Year's resolution, a documentary you just watched, or a friend who won't stop talking about their meals with their meal kit service, and you fully believe that present you represents future you's ongoing commitment. Most of the time it doesn't. That's why the subscription economy is built on projection bias. Companies know that you'll sign up in an enthusiastic moment and then forget to cancel. It's a feature of their business model, not a bug. So here's area two. Savings and future self-planning. Here's where projection bias teams up with another famous bias, hyperbolic discounting, which is our tendency to overvalue the present over the future in a way that's mathematically irrational. Together, they make long-term saving feel almost physically difficult. So when you're 28 and trying to decide whether to max out your 401k or spend that money on things that feel good now, you're essentially asking present you to sacrifice for future you. And projection bias means you genuinely don't think future you will be that different. It's hard to imagine needing dramatically more money when you're older, or being less capable of earning it, or wanting a completely different lifestyle. Future you feels kind of like current you, but further away. So this is why say for retirement is such a hard sell, even when people intellectually understand compound interest. But the emotional reality of future you doesn't land. You just can't feel it. There's a remarkable study where researchers used age progression software to show people photos of themselves as elderly. Participants who saw their aged faces allocated significantly more money to retirement savings than those who didn't. Why, friends? Well, it's because it made future you feel real. It broke the projection bias a little by forcing an emotional connection to a genuinely different future state. You think or we think about future you as a stranger. And we and we are frankly quite stingy towards strangers. Okay, in the third area, lifestyle creep. This is one of my favorites, and I talk about this frequently because it is so counterintuitive. You'd think that getting a raise would make projection bias less of a problem, right? More money, more options, better decisions, but watch what actually happens. You get a raise. In that moment of receiving good news, you're in a hot state. You're excited, you're optimistic, you're feeling abundant, and you project that feeling forward. Of course I'll be able to handle a nicer apartment. Of course I still feel like this raise was substantial even after I adjust. Future me will feel exactly as good about this money as present me does. But here's the thing: humans adapt. We're extraordinarily good at hedonic adaptation. That's the technical term for we get used to things. That nicer apartment? Within a few months, it's just your apartment. That car upgrade? Well, eventually that is just your car. The fancy gym membership? Well, that's just where you work out. The warm glow fades and your spending has ratcheted up permanently. Projection bias keeps this cycle going because every time you're considering a lifestyle upgrade, you're doing it from an excited, aspirational, present state and projecting that state forward indefinitely. You never fully account for the adaptation that's coming. Alright, so those are the three big areas. We have the big purchases, we have the savings and future self-planning, and then we have the lifestyle creep. Now I want to take a quick second to talk about how marketers use this against you. Because honestly, it's both impressive and also diabolical. Everything about how products are sold is designed to put you in a hot state and to get you to make decisions from that state. That's what aspirational advertising is. It's not just showing you a product, it's putting you emotionally in the life you'd have with that product. The car commercial isn't about the car. It's about the feeling of freedom and adventure. The real estate ad isn't about the square footage, it's about the dinner party. The fitness app doesn't sell exercise, it sells the body and the confidence and the version of yourself you're picturing right now in this motivated moment. Once you're in that state, projection bias does the rest. You assume this feeling, this clarity, this motivation, this vision of you, of your better self, you assume this feeling is going to persist. So you buy, you sign up, or you commit. Time-limited offers, that's the hot, cold empathy gap being weaponized in real time. Create urgency so you make the decision from a stressed, pressured present state and trust that you won't be able to fully imagine how you'll feel tomorrow when the deadline is gone and you're looking at a credit card bill. Knowing this doesn't make you immune, but it does give you a tiny pause button. And sometimes a pause button is everything. Okay, so how do we actually deal with this? Here are the tools. Because the whole point of the show isn't just to explain why we're irrational, it's to give you tools to do better. So here are my three favorite tools. Tool one, the future you letter. This is simple, friends, but it works. Before any major financial decision, whether it be buying a house or a car or signing a long-term subscription or contract or making a big investment, before that major financial decision, friends, write a short letter to yourself from one year in the future. Not a hopeful letter, an honest one. Dear present me, here's what actually happened after you made that decision. You don't need to be pessimistic. You just need to force your brain into a future state perspective rather than a present state one. This is sometimes called a pre-mortem in business contexts, but I like the personal letter framing better. It creates emotional contact with future you that normally doesn't exist. Here's tool two, the 72-hour rule for hot decisions. Any financial decision made in a clearly elevated emotional state, whether it be excitement or stress or hunger or post-vacation euphoria or post-argument impulsiveness, any financial decision gets a mandatory 72-hour waiting period. No exceptions. Now, friends, the goal here is not to kill your enthusiasm. It's to let your emotional state normalize so you can make the decision from a more neutral baseline. A lot of decisions that looked amazing in the showroom look different on a Tuesday morning. Some still look great, and those are probably actually good decisions. Here's tool three. Talk to someone who did adapt, who has adapted. So before you make a lifestyle upgrade, find someone who already made that upgrade a couple of years ago and ask them honestly how they feel about it. Now. Not right after, but now. How do they feel about the bigger house three years later? Or how do they feel about the boat three years later, or the private school tuition? The people who've already adapted are your best window into post-projection reality. They've lived through the hedonic adaptation you're currently projecting away. Use them. Alright, so the three tools write the future you letter, follow the 72-hour rule for hot decisions, and talk to someone who has adapted. Now, friends, let's bring this home. Projection bias is not a character flaw. It is not a failure of willpower or intelligence. It is a feature of human cognition that served us well for thousands of years and is now mildly catastrophic in a world full of 30-year mortgages and recurring subscription charges. Your brain will always use right now as its template for forever. That's just what it does. Your job, if you want to build genuine financial well-being, is to build systems and habits that create a little friction between your hot present state and your long-term decisions. Future you is a real person with different feelings, different priorities, and different opinions about whether that ski pass was worth it. They deserve a seat at the table when you're making decisions that affect them. So, friends, here's your challenge this week. Identify one recurring expense in your life that you signed up for in an enthusiastic moment, but haven't evaluated since. Just one. Look at it with the cold eyes and ask, does this actually serve who I am right now? Or is this a bill from a past version of me who had different priorities? That's projection bias reversal in action. And it might just free up some money. You got this, friends. Hey, thanks for listening to Personal Finance with Molly, a podcast all about where our money, our mindset, and our behavior intersect. If this episode hit home, please share it with someone who just got excited about a purchase. Maybe they need 72 hours. And if you haven't yet, please follow the show, leave a review, leave a comment, send me a text message. There is a link in the show notes for how to do that. It genuinely helps more people find the show. Until next time.