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Economic Consequences of Mispredicting Utility

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Author Info
Bruno S. Frey
Alois Stutzer

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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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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp218.

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Handle: RePEc:zur:iewwpx:218

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

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Find related papers by JEL classification:
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
I31 - Health, Education, and Welfare - - Welfare and Poverty - - - General Welfare
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Meier, Stephan & Stutzer, Alois, 2004. "Is Volunteering Rewarding in Itself?," IZA Discussion Papers 1045, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. Alois Stutzer & Bruno S. Frey, 2004. "Reported Subjective Well-Being: A Challenge for Economic Theory and Economic Policy," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 124(2), pages 191-231.
    Other versions:
  3. Oswald, Andrew, 1997. "Happiness and Economic Performance," The Warwick Economics Research Paper Series (TWERPS) 478, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  4. Loewenstein, George & Adler, Daniel, 1995. "A Bias in the Prediction of Tastes," Economic Journal, Royal Economic Society, vol. 105(431), pages 929-37, July. [Downloadable!] (restricted)
  5. Bruno Frey & Matthias Benz & Alois Stutzer, 2004. "Introducing Procedural Utility: Not Only What, but Also How Matters," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 160(3), pages 377-, September. [Downloadable!] (restricted)
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  6. Alois Stutzer & Bruno S. Frey, . "Stress That Doesn't Pay: The Commuting Paradox," IEW - Working Papers iewwp151, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  7. Bruno S. Frey & Alois Stutzer, 2002. "What Can Economists Learn from Happiness Research?," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 402-435, June.
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  8. 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.
  9. Clark, Andrew E & Georgellis, Yannis & Sanfey, Peter, 2001. "Scarring: The Psychological Impact of Past Unemployment," Economica, London School of Economics and Political Science, vol. 68(270), pages 221-41, May. [Downloadable!] (restricted)
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  10. Easterlin, Richard A, 2001. "Income and Happiness: Towards an Unified Theory," Economic Journal, Royal Economic Society, vol. 111(473), pages 465-84, July. [Downloadable!] (restricted)
  11. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132. [Downloadable!] (restricted)
  12. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May. [Downloadable!] (restricted)
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  13. George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2003. "Projection Bias In Predicting Future Utility," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1209-1248, November. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fehr, Ernst & Singer, Tania, 2005. "The Neuroconomics of Mind Reading and Empathy," CEPR Discussion Papers 5128, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Peter Woehrmann & Willi Semmler & Martin Lettau, . "Nonparametric Estimation of the Time-varying Sharpe Ratio in Dynamic Asset Pricing Models," IEW - Working Papers iewwp225, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  3. Stephan Meier & Alois Stutzer, . "Is Volunteering Rewarding in Itself?," IEW - Working Papers iewwp180, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  4. Mariano Torras, 2008. "The Subjectivity Inherent in Objective Measures of Well-Being," Journal of Happiness Studies, Springer, vol. 9(4), pages 475-487, December. [Downloadable!] (restricted)
  5. Ernst Fehr & Susanne Kremhelmer & Klaus M. Schmidt, . "Fairness and the Optimal Allocation of Ownership Rights," IEW - Working Papers iewwp224, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  6. Philipp C. Wichardt, . "An Application of Global Games to Signalling Models," IEW - Working Papers iewwp223, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  7. Salvador Barberà & Anke Gerber, . "A Note on the Impossibility of a Satisfactory Concept of Stability for Coalition Formation Games," IEW - Working Papers iewwp238, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  8. 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. [Downloadable!] (restricted)
  9. Philipp C. Wichardt & Pavlo R. Blavatskyy, . "Base-Rate Neglect and Imperfect Information Acquisition," IEW - Working Papers iewwp233, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  10. Ernst Fehr & Urs Fischbacher & University of Zurich, 2005. "Neuroeconomic Foundations of Trust and Social Preferences," IZA Discussion Papers 1641, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  11. Marco Gui & Luca Stanca, 2009. "Television Viewing, Satisfaction and Happiness: Facts and Fiction," Working Papers 167, University of Milano-Bicocca, Department of Economics, revised Jul 2009. [Downloadable!]
  12. Margit Osterloh & Bruno S. Frey, . "Shareholders Should Welcome Employees as Directors," IEW - Working Papers iewwp228, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  13. Falk, Armin & Fehr, Ernst & Zehnder, Christian, 2005. "The Behavioural Effects of Minimum Wages," CEPR Discussion Papers 5115, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  14. Anke Gerber, . "Learning in and about Games," IEW - Working Papers iewwp234, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  15. Juan D Carrillo & Isabelle Brocas, 2007. "Systematic errors in decision-making," Levine's Bibliography 122247000000001473, UCLA Department of Economics. [Downloadable!]
  16. Peter Woehrmann, . "A dynamic model of the financial–real interaction as a model selection criterion for nonparametric stock market prediction," IEW - Working Papers iewwp226, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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