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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 Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 218.

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Handle: RePEc:zur:iewwpx:218

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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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Citations

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Cited by:
  1. Nathan Berg & Gerd Gigerenzer, 2007. "Psychology Implies Paternalism? Bounded Rationality may Reduce the Rationale to Regulate Risk-Taking," Social Choice and Welfare, Springer, vol. 28(2), pages 337-359, February.
  2. Nicola Fuchs-Schuendeln, 2008. "On Preferences for Being Self-Employed," 2008 Meeting Papers 634, Society for Economic Dynamics.
  3. Frey, Bruno S. & Benesch, Christine & Stutzer, Alois, 2007. "Does watching TV make us happy?," Journal of Economic Psychology, Elsevier, vol. 28(3), pages 283-313, June.
  4. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundation of Trust and Social Preferences," CEPR Discussion Papers 5127, C.E.P.R. Discussion Papers.
  5. Welsch, Heinz, 2009. "Implications of happiness research for environmental economics," Ecological Economics, Elsevier, vol. 68(11), pages 2735-2742, September.
  6. Tania Singer & Ernst Fehr, 2005. "The Neuroeconomics of Mind Reading and Empathy," American Economic Review, American Economic Association, vol. 95(2), pages 340-345, May.
  7. Bruno S. Frey & Alois Stutzer, 2010. "Recent Advances in the Economics of Individual Subjective Well-Being," Working papers 2010/04, Faculty of Business and Economics - University of Basel.
  8. Falk, Armin & Fehr, Ernst & Zehnder, Christian, 2005. "The Behavioural Effects of Minimum Wages," CEPR Discussion Papers 5115, C.E.P.R. Discussion Papers.
  9. Mariano Torras, 2008. "The Subjectivity Inherent in Objective Measures of Well-Being," Journal of Happiness Studies, Springer, vol. 9(4), pages 475-487, December.
  10. repec:old:wpaper:322 is not listed on IDEAS
  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. Bruni, Luigino & Stanca, Luca, 2008. "Watching alone: Relational goods, television and happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 506-528, March.
  13. Juan D Carrillo & Isabelle Brocas, 2007. "Systematic errors in decision-making," Levine's Bibliography 122247000000001473, UCLA Department of Economics.
  14. Welsch, Heinz & Kühling, Jan, 2010. "Pro-environmental behavior and rational consumer choice: Evidence from surveys of life satisfaction," Journal of Economic Psychology, Elsevier, vol. 31(3), pages 405-420, June.

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