Will I Spend More in 12 Months or a Year? The Effect of Ease of Estimation and Confidence on Budget Estimates

Abstract

Consumers’ budgets are influenced by the temporal frame used for the budget period. Budgets planned for the next month are much lower than recorded expenses, while those for the next year are closer to recorded expenses (study 1). The difficulty of estimating budgets for the next year imparts low confidence, and leads to upward adjustment. When consumers’ confidence in their estimates is increased (study 2), when their natural beliefs about the relationship between cognitive ease and accuracy are reversed (study 3), or when cognitive resources are constrained (study 4), consumers no longer adjust their budgets upward for the next year.

Keywords: cognitive processes, economic psychology, judgment and decision making, time, experimental design and analysis, mental accounting, framing, budgeting, anchoring and adjustment

JEL Classification: M30, M31, M10, M00