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Economic Consequences of Mispredicting Utility

  • Frey, Bruno S.

    ()

    (University of Zurich)

  • Stutzer, Alois

    ()

    (University of Basel)

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 well-being. 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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7430.

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Length: 30 pages
Date of creation: May 2013
Date of revision:
Publication status: forthcoming in: Journal of Happiness Studies, 2013
Handle: RePEc:iza:izadps:dp7430
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