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Economic Consequences of Mispredicting Utility

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  • Bruno S. Frey
  • Alois Stutzer

Abstract

Individuals make systematic mistakes in their decisions, because they mispredict utility from choice options. When deciding, extrinsic attributes of choice options are more salient than intrinsic attributes. Adaptation is neglected, recollection of feelings is distorted, decisions are rationalized and wrong intuitive theories of happiness are applied. People overestimate extrinsic attributes and therefore put too much emphasis on acquiring income and gaining status. In contrast, they underestimate intrinsic attributes and devote too little time to their family, friends or hobbies, which lowers their utility level. The theoretical analysis is consistent with an econometric study on commuting decisions using reported subjective well-being data.

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Bibliographic Info

Paper provided by Center for Research in Economics, Management and the Arts (CREMA) in its series CREMA Working Paper Series with number 2005-04.

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Date of creation: Dec 2004
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Handle: RePEc:cra:wpaper:2005-04

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Keywords: adaptation; extrinsic/intrinsic attributes; individual decision-making; misprediction; subjective well-being; time allocation;

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References

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  2. Paul Frijters & John P. Haisken-DeNew & Michael A. Shields, 2004. "Investigating the Patterns and Determinants of Life Satisfaction in Germany Following Reunification," Journal of Human Resources, University of Wisconsin Press, vol. 39(3).
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  6. Bruno S. Frey & Matthias Benz & Alois Stutzer, 2003. "Introducing Procedural Utility: Not only What, but also How Matters," CREMA Working Paper Series 2003-02, Center for Research in Economics, Management and the Arts (CREMA).
  7. Maurizio Pugno, 2011. "Scitovsky and the income-happiness paradox," Working Papers, Universita' di Cassino, Dipartimento di Scienze Economiche 2011-07, Universita' di Cassino, Dipartimento di Scienze Economiche.
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Citations

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Cited by:
  1. Fuchs-Schündeln, Nicola, 2009. "On preferences for being self-employed," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 162-171, August.
  2. Welsch, Heinz & Kühling, Jan, 2010. "Pro-environmental behavior and rational consumer choice: Evidence from surveys of life satisfaction," Journal of Economic Psychology, Elsevier, Elsevier, vol. 31(3), pages 405-420, June.
  3. Juan D Carrillo & Isabelle Brocas, 2007. "Systematic errors in decision-making," Levine's Bibliography 122247000000001473, UCLA Department of Economics.
  4. Fehr, Ernst & Singer, Tania, 2005. "The Neuroconomics of Mind Reading and Empathy," CEPR Discussion Papers 5128, C.E.P.R. Discussion Papers.
  5. Nathan Berg & Gerd Gigerenzer, 2007. "Psychology Implies Paternalism? Bounded Rationality may Reduce the Rationale to Regulate Risk-Taking," Social Choice and Welfare, Springer, Springer, vol. 28(2), pages 337-359, February.
  6. Luigino Bruni & Luca Stanca, 2005. "Watching alone: Relational Goods, Television and Happiness," Working Papers, University of Milano-Bicocca, Department of Economics 90, University of Milano-Bicocca, Department of Economics, revised Jun 2005.
  7. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundation of Trust and Social Preferences," CEPR Discussion Papers 5127, C.E.P.R. Discussion Papers.
  8. Mariano Torras, 2008. "The Subjectivity Inherent in Objective Measures of Well-Being," Journal of Happiness Studies, Springer, Springer, vol. 9(4), pages 475-487, December.
  9. Falk, Armin & Fehr, Ernst & Zehnder, Christian, 2005. "The Behavioural Effects of Minimum Wages," CEPR Discussion Papers 5115, C.E.P.R. Discussion Papers.
  10. Stutzer, Alois & Frey, Bruno S., 2010. "Recent Advances in the Economics of Individual Subjective Well-Being," IZA Discussion Papers 4850, Institute for the Study of Labor (IZA).
  11. Tilman Tacke & Robert J. Waldmann, 2009. "Income Distribution, Infant Mortality, and Health Care Expenditure," CEIS Research Paper 146, Tor Vergata University, CEIS, revised 30 Sep 2009.
  12. Frey, Bruno S. & Benesch, Christine & Stutzer, Alois, 2007. "Does watching TV make us happy?," Journal of Economic Psychology, Elsevier, Elsevier, vol. 28(3), pages 283-313, June.
  13. repec:old:wpaper:322 is not listed on IDEAS
  14. Welsch, Heinz, 2009. "Implications of happiness research for environmental economics," Ecological Economics, Elsevier, vol. 68(11), pages 2735-2742, September.

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