Economic Consequences of Mispredicting Utility

IEW Working Paper No. 218

32 Pages Posted: 3 Jan 2005

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

Multiple version iconThere are 2 versions of this paper

Date Written: December 2004

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.

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 (December 2004). IEW Working Paper No. 218. Available at SSRN: https://ssrn.com/abstract=639025 or http://dx.doi.org/10.2139/ssrn.639025

Bruno S. Frey

CREMA ( email )

Südstrasse 11
Zurich, CH 8008
Switzerland
+41 44 380 00 78 (Phone)

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

Alois Stutzer (Contact Author)

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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