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Experienced Utility versus Decision Utility: Putting the 'S' in Satisfaction

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  • Steven Carter

    ()
    (Department of Economics, University of California-Irvine)

  • Michael McBride

    ()
    (Department of Economics, University of California-Irvine)

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 with a unique experimental data set, we test whether post-choice satisfaction (experienced utility), like decision utility, 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

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 080925.

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Length: 35 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:irv:wpaper:080925

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Keywords: Happiness; Utility; Experiment; Value function; Prospect theory;

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References

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  1. Gary Charness & Brit Grosskopf, 1999. "Relative payoffs and happiness: An experimental study," Economics Working Papers 436, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2000.
  2. Kahneman, Daniel & Wakker, Peter P & Sarin, Rakesh, 1997. "Back to Bentham? Explorations of Experienced Utility," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 375-405, May.
  3. Alan B. Krueger & David A. Schkade, 2007. "The Reliability of Subjective Well-Being Measures," NBER Working Papers 13027, National Bureau of Economic Research, Inc.
  4. Ada Ferrer-i-Carbonell & Paul Frijters, 2004. "How Important is Methodology for the estimates of the determinants of Happiness?," Economic Journal, Royal Economic Society, vol. 114(497), pages 641-659, 07.
  5. Michael McBride, 2007. "Money, Happiness, and Aspirations: An Experimental Study," Working Papers 060721, University of California-Irvine, Department of Economics, revised Jul 2008.
  6. Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Layard, R. & Mayraz, G. & Nickell, S., 2008. "The marginal utility of income," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1846-1857, August.
  8. MatthewD. Rablen, 2008. "Relativity, Rank and the Utility of Income," Economic Journal, Royal Economic Society, vol. 118(528), pages 801-821, 04.
  9. Vendrik, Maarten C.M. & Woltjer, Geert B., 2007. "Happiness and loss aversion: Is utility concave or convex in relative income?," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1423-1448, August.
  10. 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.
  11. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  12. Loewenstein, George & Ubel, Peter A., 2008. "Hedonic adaptation and the role of decision and experience utility in public policy," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1795-1810, August.
  13. George J. Stigler, 1950. "The Development of Utility Theory. II," Journal of Political Economy, University of Chicago Press, vol. 58, pages 373.
  14. Mandler, Michael, 1999. "Dilemmas in Economic Theory: Persisting Foundational Problems in Microeconomics," OUP Catalogue, Oxford University Press, number 9780195100877, Octomber.
  15. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, Octomber.
  16. Daniel Kahneman & Richard H. Thaler, 2006. "Anomalies: Utility Maximization and Experienced Utility," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 221-234, Winter.
  17. Clark, Andrew E. & Frijters, Paul & Shields, Michael A., 2007. "Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," IZA Discussion Papers 2840, Institute for the Study of Labor (IZA).
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Citations

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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 C.M., 2012. "Misery Loves Company: Exogenous Shocks in Retirement Expectations and Social Comparison Effects on Subjective Well-Being," IZA Discussion Papers 6863, Institute for the Study of Labor (IZA).
  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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