Freedom, Markets, and Well-being Fall 2018

Experienced Utility

Overview

Kahneman and Krueger seek to revive the eighteenth-century version of utility: actual felt happiness rather than revealed preferences. They note that psychological research has shown two ways of measuring this. One involves what they call “experienced utility” while the other involves what they call “remembered utility.”

Those two measurements sometimes yield different results. For example, people tend to remember the extremes and end of an experience more than the other moments. If you summed my momentary experiences of holding my hand in an ice bucket, they would be negative. But if you warm up the bucket at the end, I will remember the experience more favorably.

The two measures can be used for different purposes. If you want to predict behavior, remembered utility is the more useful one. If you want to get some insight into how a person’s day goes, the experienced utility measure is probably your better bet. And if you want to look for adaptive preferences, you would look for divergence between them.

Background

Jeremy Bentham assumed that choice is caused by feelings of pleasure and pain.

Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. On the one hand the standard of right and wrong, on the other the chain of causes and effects, are fastened to their throne. They govern us in all we do, in all we say, in all we think: every effort we can make to throw off our subjection, will serve but to demonstrate and confirm it. In words a man may pretend to abjure their empire: but in reality he will remain subject to it all the while. The principle of utility recognises this subjection, and assumes it for the foundation of that system, the object of which is to rear the fabric of felicity by the hands of reason and of law. Systems which attempt to question it, deal in sounds instead of sense, in caprice instead of reason, in darkness instead of light. (Bentham [1789] 1993, ch. 1 §1)

With this assumption in hand, Bentham can infer pleasure and pain on the basis of observed choices. So he could make predictions and policy with the same units that measure pleasure and pain. But economists rarely make that assumption now. There is good reason to doubt that there is a simple relationship between choices and feelings of pleasure and pain in the first place. And even if pleasure and pain do motivate all of our choices, we can’t compare one person’s feelings with another and so we can’t draw conclusions about the aggregate of pleasure and pain as we would need to do in order to make policy.

One thing that is interesting about Kahneman and Krueger is that they show how you can make reasonably quantifiable estimates of feelings of pleasure and pain. It’s not quite Bentham, but it’s pretty close.

We can use this to tell us things, such as that unemployment makes people a lot more unhappy than inflation does. Consequently, the so-called “misery index” that combined inflation and unemployment rates, was not well formulated. It treated inflation and unemployment as equally bad when the experience of the latter is far worse than the experience of the former.

We also got some insight into how people experience their daily routine (Kahneman and Krueger 2006, 13). Among other things, this tells us that we could reduce unhappiness quite a bit if we could cut the commuting time. That seems relevant for public policy!

Our Discussion

Professor Brown started our discussion with a seeming paradox. Economists can prove, with a graph no less, that taxation lowers utility. Yet when New York passed a tax on cigarettes, people reported they were happier. How could this be?

We ended up with the U-Index. This is Kahneman and Krueger’s way of making interpersonal comparisons of utility. The idea is to measure the portion of your day spent in an unpleasant state. Someone who spends a larger portion of the day in the unpleasant range is worse off than someone who spends a smaller portion of the day in the unpleasant range.

This would give us a lot more information than we would get out of mere revealed preferences and it’s interesting to think of how we would use the additional information.

The Peters mentioned some pitfalls. Peter T. noted that the U-Index doesn’t tell you how bad the unpleasant state was. Boredom and torture both put you in the negative side of the U-Index. But it would be bizarre to say that someone who was bored all afternoon is worse off than someone who was tortured for fifteen minutes. Peter N. noted that some activities are desirable even though they involve a lot of time in the unpleasant zone. Athletic training is like this, or so I’m told. So is writing; that I can personally attest to.

References

Bentham, Jeremy. (1789) 1993. An Introduction to the Principles of Morals and Legislation. Edited by Mark C. Rooks. British Philosophy: 1600-1900. Charlottesville, VA: InteLex Corporation.

Kahneman, Daniel, and Alan B. Krueger. 2006. “Developments in the Measurement of Subjective Well-Being.” Journal of Economic Perspectives 20 (1): 3–24.