Aspects of utility theory

Expected-utility: uncertain states

Multi-attribute: attributes, criteria, goals

Utilitarianism: people

Intertemporal choice: times

Examples of choice over time

health behaviors (eating, exercise, smoking, etc.)

other preventive medicine (moles, exams)

addiction

(under)saving - individuals and governments

lack of planning (asteriods, global warming)

retirement saving

One view

Discounting and health

Normative theory: exponential discounting

u(t) = U₀e^-βt, or, if U₀=1, r(t) = e^-βt

Note: this is about decision utility.

Reasons for discounting

Risk

Interest - everybody else does it

Pure time preference

Increasing standard of living

Changes in values (identity)

Why discount lives

A. Save a life now, at T0, for $100.

B. Invest the money. Wait until it doubles at time T1. Save 2 lives for $200. (Assume no change in cost of lifesaving.)

C. At T1, invest the money, wait until T2, then save 4 lives.

Oops.

If we discount the lives at the rate of interest, this won't happen.
Thus, (1 life at T0) == (2 lives at T1) == (4 lives at T2).

Hyperbolic discounting

u(t) = a/d(t+c)

Summary of findings (descriptive)

• animals, people, short term, long term
• dynamic inconsistency
  

  A. one candy now vs. 3 in 24 hours.

  B. one candy in 24 hours vs. 3 in 48 hours.

  Same choice made at different times.

• both hypothetical (and long-term) and real choices
• excessive discounting (e.g., air conditioners)
• more discounting of smaller rewards
• less discounting for losses (dread?)
• health-money difference
• inflation interacts with delay, not p (Ostazewski, Green & Myerson)
• individual differences
  • age
  • "ego strength"
  • heroin addiction (Kirby)

Analogy with cooperation

Self control: Thaler's examples

1. Mr. and Mrs. J. have saved $15,000 toward their dream vacation home. They hope to buy the home in five years. The money earns 10% in a money-market account. They just bought a new car for $11,000, which they financed with a three-year car loan at 15%.

2. Mr. S. admires a $125 cashmere sweater at the department store. He declines to buy it, feeling that it is too extravagant. Later that month he receives the same sweater from his wife for a birthday present. He is very happy. Mr. and Mrs. S. have only joint bank accounts.

Ainslie's prescriptive theory

Modern methods

SnuzNLuz

Clock that makes you save

Emotions

future	assimilation	+	certain	savoring
future	assimilation	+	uncert.	hope
future	assimilation	-	certain	dread
future	assimilation	-	uncert.	fear
future	contrast	+	certain	impatience
future	contrast	+	uncert.	fear?
future	contrast	-	certain	?
future	contrast	-	uncert.	?
past	assimilation	+	certain	savoring
past	assimilation	-	certain	horror?
past	contrast	+	certain	missing
past	contrast	-	certain	relief

+ and - refer to the event, not the emotion

Heuristics (Loewenstein and Prelec)

1. spreading good outcomes out
2. preferring improvement over decline

A. dinner at a fancy French restaurant on Friday in 1 month vs.
B. dinner at the French restaurant on Friday in 2 months

A. dinner at the French restaurant on Friday in 1 month and dinner at a local Greek restaurant on Friday in 2 months, vs.
B. dinner at the French restaurant on Friday in 2 months and dinner at a local Greek restaurant on Friday in 1 month

A. dinner at the French restaurant on Friday in 1 month and dinner at home on Friday in 2 months
B. dinner at the French restaurant on Friday in 2 months dinner at home on Friday in 1 months

Framing (Loewenstein and Prelec)

Subjects were asked when they would use two $100 coupons to their favorite restaurants.

• No time constraint.
• 2 years
• 4 months

The 2-year group preferred longer delays than either of the other groups. They wanted to spread out the dinners over the whole interval. Of course, the first group had an even longer interval, but it was not brought to their attention.

Framing (Loewenstein and Prelec)

Subjects were asked when they would use two $100 coupons to their favorite restaurants.

• No time constraint.
• 2 years
• 4 months

The 2-year group preferred longer delays than either of the other groups. They wanted to spread out the dinners over the whole interval. Of course, the first group had an even longer interval, but it was not brought to their attention.

Framing (Loewenstein and Prelec)

Subjects were asked when they would use two $100 coupons to their favorite restaurants.

• No time constraint.
• 2 years
• 4 months

The 2-year group preferred longer delays than either of the other groups. They wanted to spread out the dinners over the whole interval. Of course, the first group had an even longer interval, but it was not brought to their attention.

Framing (Loewenstein and Prelec)

Subjects were asked when they would use two $100 coupons to their favorite restaurants.

• No time constraint.
• 2 years
• 4 months

The 2-year group preferred longer delays than either of the other groups. They wanted to spread out the dinners over the whole interval. Of course, the first group had an even longer interval, but it was not brought to their attention.