Economic Consequences of Mispredicting Utility

30 Pages Posted: 22 Jun 2013

See all articles by Bruno S. Frey

Bruno S. Frey

CREMA; University of Basel

Alois Stutzer

University of Basel - Faculty of Business and Economics; IZA Institute of Labor Economics

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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 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.

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

JEL Classification: A12, D11, D12, D84, I31, J22

Suggested Citation

Frey, Bruno S. and Stutzer, Alois, Economic Consequences of Mispredicting Utility. IZA Discussion Paper No. 7430. Available at SSRN: https://ssrn.com/abstract=2283545

Bruno S. Frey (Contact Author)

CREMA ( email )

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+41 44 380 00 78 (Phone)

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

Alois Stutzer

University of Basel - Faculty of Business and Economics ( email )

Peter Merian-Weg 6
4002 Basel
Switzerland
0041 61 267 3361 (Phone)
0041 61 267 3340 (Fax)

HOME PAGE: http://www.wwz.unibas.ch/stutzer/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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