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Utility Maximization and Experienced Utility

Bibliographic Data

ID4029638
AuthorsDaniel Kahneman (Eugene Higgins Professor of Psychology and Professor of Public Affairs, Woodrow Wilson School, both at Princeton University, Princeton, New Jersey.), Richard H Thaler (0000-0001-7550-2855, Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics and Director of the Center for Decision Research, Graduate School of Business, both at the University of Chicago, Chicago, Illinois.)
Year2006
Volume20
Issue1
Pages221-234
Publication date2006-02-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueThe Journal of Economic Perspectives (JOURNAL)
Journal identifiersISSN: 0895-3309 • E-ISSN: 1944-7965
PublisherAmerican Economic Association (PUBLISHER • US)
DOI10.1257/089533006776526076
OpenAlexW3124551585
LanguageEN
Citations received114
References cited25

In this column, we discuss a version of the utility maximization hypothesis that can be tested-and we find that it is false. We review empirical challenges to utility maximization, which return to the old question of whether preferences optimize the experience of outcomes. Much of this work has focused on a necessary condition for utility-maximizing choices: an ability of economic agents to make accurate, or at least unbiased, forecasts of the hedonic outcomes of potential choices. The research we review shows that this condition is not satisfied: people do not always know what they will like; they often make systematic errors in predicting their future experience of outcomes and, as a result, fail to maximize their experienced utility. We discuss four areas in which errors of hedonic forecasting and choice have been documented: 1) where the emotional or motivational state of the agent is very different at t0 and at t1; 2) where the nature of the decision focuses attention on aspects of the outcome that will not be salient when it is actually experienced; 3) when choices are made on the basis of flawed evaluations of past experiences; and 4) when people forecast their future adjustment to new life circumstances

Actuarial science · Economics · Expected utility hypothesis · Mathematical economics · Maximization · Microeconomics · Salient · Subjective expected utility · Utility maximization · Computer Science · Decision-Making and Behavioral Economics · Economic and Environmental Valuation · Housing Market and Economics · Artificial Intelligence

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