decision. The data are not inconsistent with this phenomenon, but the relationship is not particularly strong. Nonetheless, projection bias provides a cautionary note to all who may be out shopping in extreme weather. Apparently, current weather can unduly influence our purchases and can result in wasted money or the added hassle of returning unwanted items.

The Role of Emotions and Visceral Factors

in Choice

A special class of projection biases are a result of what George Loewenstein calls visceral factors. Visceral factors include emotions and physical drives or feelings. Prominent examples of physical drives or feelings include hunger, pain, or feeling cold. Emotions include embarrassment, fear, anger, or jealousy. Visceral factors clearly affect preferences and decisions, though they have presented a challenge to economists historically because of their transient nature. For example, people generally become hungry several times a day, and each time their preferences change in response to the hunger. Weather can change very quickly and is often considered an entirely random process. Nonetheless, these visceral factors have predictable impacts on our preferences and cause some systematic behavior—for example, purchasing clothing we will later return.

We say that a person is in a hot state when a visceral factor is active. Thus, if we were studying decisions regarding food, one would be in a hot state when one is hungry. When the visceral factor is inactive, we say that the decision maker is in a cold state. Simple projection bias leads people to underestimate the impact of visceral factors on their preferences. People who are not hungry do not recognize how tempting more-indulgent food may be when they eventually find themselves in a hot state. This can lead dieters in a cold state to load the freezer with ice cream, believing that they can regulate their consumption. Later they regret their actions after a hot-state binge. Moreover, when in a hot state, one has a hard time remembering what it is like to be in a cold state. Thus, a particularly hungry shopper loads up on unplanned and less-healthy items that he might not really want when he is just mildly hungry. This inability to project utility across hot or cold states is called the hot–cold empathy gap.

It is extremely difficult to resist the urge to satisfy a visceral factor. Loewenstein goes so far as to question whether we can really talk about most responses to visceral factors as a choice. In some cases, humans are able to use cognitive reasoning or tricks to overcome such visceral factors. For example, children when told not to eat a marshmallow that is placed in front of them try to distract themselves by, for example, looking away or singing a song. Of course, resisting a visceral urge is difficult, and one is not always successful. Much of this failure may be attributed to the hot–cold empathy gap. By not recognizing how a change in visceral factors will affect preferences, decision makers can fail to give themselves the tools to deal with them when they arise. Loewenstein attributes three distinct types of behavior to the hot–cold empathy gap.

First, when negotiating a new contract or relationship, people fail to recognize how preferences will change should a situation arise that induces a visceral factor. For example, a new employee may be excited about his job and might not consider the

possibility that he might one day become angry at management and decide to quit. The hot–cold empathy gap could lead this new employee to value some benefits more highly than he should. For example, a young worker taking his first job might consider benefits such as a guaranteed pension or college tuition for dependent children to be big selling points in taking the job. The worker might even have been willing to take a lower salary given the possibility of making use of the pension or tuition benefit. These benefits, however, are ineffective unless one stays in the employ of the company long enough for them to be effective. If the relationship with the employer turns sour before children begin college, the employee could find himself in a bind. College is a significant expense. Now this tuition benefit could force the decision maker to choose either to stay longer in a bad job or to cut back spending severely in order to quickly save for the expense.

Second, the hot–cold empathy gap can lead to self-control problems. Invariably, people who are trying to avoid some compulsive behavior must depend upon the decisions they make when they are in a cold state in order to withstand the hot state. Cold-state decisions can affect exposure to the visceral factor, access to the behavior that satisfies the visceral factor, and whether responding to the factor will be socially acceptable to the group in which the decision maker finds himself. For example, if you are trying to give up cigarettes, you might recognize that it is a bad idea to keep cigarettes around the house. However, in a cold state you might not recognize that being with a certain group of friends who continue to smoke could eventually trigger the desire to smoke. This group of friends might work to defeat your resolve and make cigarettes available to you when the craving eventually strikes. Moreover, after you have given in and you return to a cold state, you will not remember the intensity of the desire that led you to give in, asking yourself, “How could I have behaved this way?”

Finally, the hot–cold empathy gap can lead people to overrespond to certain risks owing to an overwhelming feeling of fear. In nearly every Jack Black movie, we find the main character with a crush on some relatively attractive woman who is entirely unaware of his feelings. He resolves several times to tell her his feelings and is presented the opportunity, but in the end cannot muster the courage to actually ask the woman out. This oft-repeated movie meme has real-world counterparts. When the person is not in the act of talking to the woman, the fear of rejection is not present. In this cold state it is easy to make plans to reveal one’s feelings and expose oneself to the substantial risk of rejection. Thinking through the problem rationally, rejection is not such a bad outcome. In fact, rejection has much the same effect as never asking the woman out in the first place. In this case, why not ask her? When the time comes, though, fear takes hold, creating an irrational aversion to rejection. In this hot state, rejection is worse than a life of loneliness. Hence, the decision maker chickens out.

It is possible to model the hot–cold empathy gap in each of these behaviors using the simple projection-bias model already introduced. Thus, we could think of ux1, x2, s as the utility of actions x1 and x2 in state s, where s =sh, sc. Here sh represents a hot state, and sc represents a cold state. If x1 represents an action associated with the visceral factor, then changing the state has two effects on the utility function. Let x1, x2 be the level of consumption one would choose in the cold state; that is, the pair x1, x2 solve maxx1, x2 ux1, x2, sc subject to whatever budget constraints the decision maker might face. In many cases, x1 is 0. The first impact of state on the utility function is that being in

u

u(x1, x2, sh)

u(x1, x2, sc)

a hot state reduces the utility of consumption evaluated at x1, as depicted in Figure 11.4. Thus, a smoker who suddenly gets a craving for a cigarette finds himself feeling much worse off for not consuming a cigarette than he did before the craving. Second, the utility of action x1 becomes steeper in a hot state than in a cold state. In general, this leads to choosing a much higher level of x1 in the hot state than in the cold state.

In many cases we are interested in modeling people who are trying to quit some compulsive behavior. In this case, ux1, x2, s represents the instantaneous preferences of the person, but it does not necessarily represent his well-being. Rather, in this case it would be common to think of ux1, x2, sc, his preferences in a cold state, as representing his true well-being. Thus, in the hot state, one chooses to maximize ux1, x2, sh but ends up receiving ux1, x2, sc. In this case, the visceral factor leads him to choose actions that leave him worse off than he could have been. Using this interpretation of, for example, the problem of shopping hungry leads to the clear conclusion that we should always shop on a full stomach. However, making such a statement requires us to know that ux1, x2, sh is a misperception—a controversial statement to say the least. In one state the person displays one set of preferences, and in the other he displays another set. It would be difficult to find some scientifically valid way to determine which was right and which was wrong (or even if there were a right and wrong). For this reason, many economists shy away from this type of language.

Modeling the Hot–Cold Empathy Gap

In many situations, we want to consider the visceral factor as a continuous variable. Then we can speak about the level of hunger (or anger, etc.) instead of just the possible states hungry or not hungry. In terms of calculus, the two requirements of a visceral factor can then be stated as

x1 s

Equation 11.27 tells us that utility declines when the visceral factor, s, increases if one holds consumption of both goods constant. Equation 11.28 tells us that marginal utility of the good associated with the visceral factor becomes steeper as the visceral factor increases. One simple utility function that satisfies these conditions is given by

Let’s use equation 11.29 to model the decision behavior of someone who is trying to cut back on smoking. In this case, s represents the level of craving, x1 how much the smoker decides to smoke in that time period, and x2 how much the smoker decides to engage in other activities. Consider that both activities have a price of $1 per unit and that the smoker faces a budget constrain of w. Then, the decision maker must solve

Recognizing that the budget constraint will bind, we find that x2 = w − x1, and we can restate the consumer problem as

optimal x2. Of course, here we have only modeled the difference in preferences between hot and cold states. Modeling the hot–cold empathy gap requires additionally implementing simple projection bias in an intertemporal choice problem. Thus, we may think about a first-period decision to either socialize with smoking friends or not socialize with smoking friends while experiencing a relatively low level of craving s. In addition, we must assume that deciding to socialize with smokers changes the utility function, either making smoking innately more attractive or potentially affecting s. Given a level of projection bias, α, we could then find a level of craving s that would lead to subsequently deciding to smoke. Such a model could easily account for self-defeating behavior in which the smoker places himself in a position where he is certain to give in to urges he wishes to control.

EXAMPLE 11.5 Raging Suburban Mothers

Shirley Henson, a 40-year-old secretary, set out on her way home from work one fateful day in Alabama. No doubt she was looking forward to returning home to her husband and son. She entered Interstate 65 and merged into traffic just behind Gena Foster, a 34- year-old mother of three children also on her way home from work. Neither had met before. Within hours, Gena was dead and Shirley was charged with her murder. Neither had had any previous history of legal problems or violence. Both had families who described them as generally kind people.

But, in a hurry to get home, Shirley was tailgating Gena. Gena became annoyed and angry and slammed on her brakes to scare Shirley. It didn’t work. As they picked up speed again, Shirley was even more determined to ride the bumper of the car in front of her. Shirley describes Gena as making obscene gestures and even throwing small objects out of her car at her. Nonetheless, Shirley would not give Gena the satisfaction of slowing down. How could she capitulate to someone who had been so rude? Finally, Gena pulled off at an exit, perhaps trying to finally lose the tailgater. To Gena’s astonishment, Shirley pulled off at the same exit and continued to tailgate.

That was it. Gena stopped her car, blocking Shirley’s way. Gena got out and walked back to Shirley’s car. Shirley rolled down her window. Exasperated, Gena began yelling at Shirley for tailgating. Shirley claims that Gena spat on her, and began to lunge at her. As Gena lunged, Shirley pointed a pistol squarely at Gena’s face and pulled the trigger. Gena died instantly.

When one thinks of the passions that might drive a mother to take the life of another, one usually conjures up images of threats to her children or perhaps vile situations involving infidelity. One would be hard pressed to believe tailgating might be the cause. What would lead a seemingly calm and quiet person to shoot another at point-blank range? Shirley herself says she was not angry but fearful. She describes a situation in which she was full of adrenalin, and her survival instincts took over. She panicked. It would be hard to rationalize the actions that would eventually see her sentenced to 13 years in prison. Clearly, slowing down or even pulling off the road entirely would be preferable to 13 years in prison even if it meant she would be later in getting home. Even once Gena’s actions had perhaps made her angry, escalating the event seems clearly to be a bad idea in retrospect.

Nonetheless, such visceral influences as anger can be difficult to control in the heat of the moment and can swamp out your longer-term—cold-state—preferences. It would seem like a better idea for Gena to simply pull of the road and let the other car go around than to risk injury by slamming on the brakes or initiating a roadside confrontation. No doubt, in a cold state Shirley would have made decisions to back off, pull off at a different exit, leave her window rolled up, and perhaps attempt to apologize when confronted. All else failing, even if the unarmed Gena would not have backed down, it seems preferable to take a measure of spittle, and even a substantial beating, rather than facing a charge of manslaughter or murder.

Everyone at some time or another is led to clearly self-destructive actions by anger, though perhaps not quite as destructive as this road-rage incident. A brother might have swiped a toy out of your hands when you were younger. Instead of finding another toy,

you might have attempted to take the toy back, resulting in an escalation of hitting, kicking, scratching, and eventually calling for parents to intervene. It usually doesn’t take more than a few minutes of retrospective thinking to come to the conclusion that some other course of action might have been better. If we believe in the hot–cold empathy gap, a cooling-off period could be key to avoiding substantially destructive behavior. Waiting for a visceral factor to dissipate allows one to make the choice while considering more-reasonable preferences. Suppose that after several miles of Shirley tailgating Gena, a traffic jam intervened and both were slowed to a dead stop for 20 minutes. The annoyance and anger might not have completely disappeared, but both women would likely have had the time to think of more productive responses to the situation.

Similarly, cooling-off periods can be helpful for consumers. One often receives the advice not to buy on impulse. Seeing a product demonstration or witnessing a particularly stirring sales pitch can lead us to a heightened sense of need for a product. In this visceral state, we may be led to make a purchase that we would regret in hindsight. Salespeople are skilled at creating a feeling of need and urgency to make the purchase. “This will be your last chance to get such a good deal,” they might say. They clearly want to work on your emotions more than your sense of reason or rationality. For this reason, the government often requires those selling time-share vacation homes, and many other large and expensive investments, to allow consumers a period of 10 days in which to change their minds. Similarly, one must wait five days to obtain a handgun in many cases. Many states require a waiting period for obtaining a divorce. Under a rational decisionmaking model, such waiting periods would be superfluous. Why would anyone change their mind about buying a large investment in only 10 days’ time? Similarly, how could five days reduce my desire to use a gun for some nefarious purpose? In fact, many people make use of the 10-day rule on time shares. Many couples decide to stay married after a term of separation—some even remarry their original spouse after a divorce. As a consumer (or a frustrated driver), taking your time to make a decision can help ensure that you are responding to long-term preferences and not a transitory visceral urge you might grow to regret.

EXAMPLE 11.6 An Obvious Pitch

To patent a new process, invention, or substance, one must demonstrate that it is new, it is beneficial to others, and it was not a trivial or obvious innovation at the time the innovation was made. The requirement that it be a nonobvious innovation excludes trivial innovations that more than likely were discovered by many people simultaneously. Of each of these requirements, the hardest to prove is that the innovation was nonobvious. In fact, most patents are challenged along these lines, and this patent requirement ends up in the courts more often than any other. Juries in these patent trials are first introduced to the innovation and then asked to determine whether it was obvious or not. This requires the jury members to consider whether the innovation was obvious, after they already have an understanding and knowledge of the innovation. In essence, they must attempt to consider the innovation as if they did not yet know what they have learned and determine