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Economic Consequences of Mispredicting Utility

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  • Bruno S. Frey
  • Alois Stutzer

Abstract

In a simple conceptual framework, we organize a multitude of phenomena related to the (mis)prediction of utility. Consequences in terms of distorted choices and lower wellbeing emerge if people have to trade-off between alternatives that are characterized by attributes satisfying extrinsic desires and alternatives serving intrinsic needs. Thereby the neglect of asymmetries in adaptation is proposed as an important driver. The theoretical analysis is consistent with econometric evidence on commuting choice using data on subjective wellbeing. People show substantial adaptation to a higher labor income but not to commuting. This may account for the finding that people are not compensated for the burden of commuting.

Suggested Citation

  • Bruno S. Frey & Alois Stutzer, 2013. "Economic Consequences of Mispredicting Utility," SOEPpapers on Multidisciplinary Panel Data Research 564, DIW Berlin, The German Socio-Economic Panel (SOEP).
  • Handle: RePEc:diw:diwsop:diw_sp564
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. World Bank, 2015. "Malaysia Economic Monitor, June 2015," World Bank Other Operational Studies 22038, The World Bank.
    3. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundations of Trust and Social Preferences," IZA Discussion Papers 1641, Institute for the Study of Labor (IZA).
    4. Bruno S. Frey, 2011. "Subjective Well-Being, Politics and Political Economy," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(IV), pages 397-415, December.
    5. 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.
    6. Fuchs-Schündeln, Nicola, 2009. "On preferences for being self-employed," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 162-171, August.
    7. 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.
    8. 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.
    9. Krekel, Christian & Zerrahn, Alexander, 2017. "Does the presence of wind turbines have negative externalities for people in their surroundings? Evidence from well-being data," Journal of Environmental Economics and Management, Elsevier, vol. 82(C), pages 221-238.
    10. repec:eee:joepsy:v:61:y:2017:i:c:p:29-38 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. repec:zbw:hohpro:322 is not listed on IDEAS
    13. Krekel, Christian & Kolbe, Jens & Wüstemann, Henry, 2016. "The greener, the happier? The effect of urban land use on residential well-being," Ecological Economics, Elsevier, vol. 121(C), pages 117-127.
    14. Mariano Torras, 2008. "The Subjectivity Inherent in Objective Measures of Well-Being," Journal of Happiness Studies, Springer, vol. 9(4), pages 475-487, December.
    15. repec:old:wpaper:322 is not listed on IDEAS
    16. Armin Falk & Ernst Fehr & Christian Zehnder, "undated". "The Behavioral Effects of Minimum Wages," IEW - Working Papers 247, Institute for Empirical Research in Economics - University of Zurich.
    17. Reto Odermatt & Alois Stutzer, 2015. "(Mis-)Predicted Subjective Well-Being Following Life Events," SOEPpapers on Multidisciplinary Panel Data Research 787, DIW Berlin, The German Socio-Economic Panel (SOEP).
    18. Juan D Carrillo & Isabelle Brocas, 2007. "Systematic errors in decision-making," Levine's Bibliography 122247000000001473, UCLA Department of Economics.
    19. Welsch, Heinz & Kühling, Jan, 2011. "Are pro-environmental consumption choices utility-maximizing? Evidence from subjective well-being data," Ecological Economics, Elsevier, vol. 72(C), pages 75-87.
    20. 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.
    21. Odermatt, Reto & Stutzer, Alois, 2017. "Subjective Well-Being and Public Policy," IZA Discussion Papers 11102, Institute for the Study of Labor (IZA).
    22. AMENDOLA, Adalgiso & DELL'ANNO, Roberto & PARISI, Lavinia, 2015. "Happiness, Inequality and Relative Concerns in European Countries," CELPE Discussion Papers 136, CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy.
    23. Nathan Berg & Gerd Gigerenzer, 2007. "Psychology Implies Paternalism? Bounded Rationality may Reduce the Rationale to Regulate Risk-Taking," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 28(2), pages 337-359, February.
    24. Welsch, Heinz, 2009. "Implications of happiness research for environmental economics," Ecological Economics, Elsevier, vol. 68(11), pages 2735-2742, September.

    More about this item

    Keywords

    Adaptation; extrinsic/intrinsic attributes; individual decision-making; misprediction; subjective well-being; time allocation;

    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, Well-Being, and Poverty - - - General Welfare, Well-Being
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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