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Experienced utility versus decision utility: Putting the ‘S’ in satisfaction

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  • Carter, Steven
  • McBride, Michael

Abstract

Recent research distinguishes an individual's decision utility, inferred from her observed choices, from her experienced utility, which more closely matches the notion of happiness. Using various estimation techniques, we test whether post-choice satisfaction (experienced utility), like decision utility in an experimental data set, is S-shaped with loss aversion around a given reference point. We also present a model which estimates the satisfaction function and reference point simultaneously. When pooling the data across individuals, we find an S-shaped satisfaction function in which the reference point depends on past payments, social comparisons, and subjective expectations. There is mixed evidence of loss aversion. At the individual level, there is substantial variation in satisfaction function shapes, although the S-shape is common. Though the two notions of utility are distinct, our findings imply that the two are related at a fundamental level.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

Volume (Year): 42 (2013)
Issue (Month): C ()
Pages: 13-23

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Handle: RePEc:eee:soceco:v:42:y:2013:i:c:p:13-23

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Web page: http://www.elsevier.com/locate/inca/620175

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Keywords: Happiness; Value function; Prospect Theory;

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References

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  2. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
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  8. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
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  11. Mandler, Michael, 2001. "Dilemmas in Economic Theory: Persisting Foundational Problems of Microeconomics," OUP Catalogue, Oxford University Press, number 9780195145755, September.
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Cited by:
  1. Michael McBride, 2007. "Money, Happiness, and Aspirations: An Experimental Study," Working Papers 060721, University of California-Irvine, Department of Economics, revised Jul 2008.
  2. Montizaan Raymond & Vendrik Maarten, 2012. "Misery Loves Company; Exogenous Shocks in Retirement Expectations and Social Comparison Effects on Subjective Well-Being," Research Memorandum 049, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. Switek, Malgorzata, 2012. "Internal Migration and Life Satisfaction: Well-Being Effects of Moving as a Young Adult," IZA Discussion Papers 7016, Institute for the Study of Labor (IZA).

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