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Anomalies: Utility Maximization and Experienced Utility
Author(s): Daniel Kahneman and Richard H. Thaler
Source: The Journal of Economic Perspectives , Winter, 2006, Vol. 20, No. 1 (Winter,
2006), pp. 221-234
Published by: American Economic Association
Stable URL: https://www.jstor.org/stable/30033642
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Journal of Economic Perspectives-Volume 20, Number 1-Winter 2006-Pages 221-234
Anomalies
Utility Maximization and Experienced
Utility
Daniel Kahneman and Richard H. Thaler
Economics can be distinguished from other social sciences by the belief th
most (all1) behavior can be explained by assuming that rational agents with stab
well-defined preferences interact in markets that (eventually) clear. An empiri
result qualifies as an anomaly if it is difficult to rationalize or if implaus
assumptions are necessary to explain it within the paradigm. Suggestions for fut
topics should be sent to Richard Thaler, c/o Journal of Economic Perspectives, Grad-
uate School of Business, University of Chicago, Chicago, Illinois 60637 o
(richard.thaler@gsb.uchicago.edu).
Introduction
The assumption that utility is always maximized allows often surprising infer
ences about the nature of the desires that guide people’s ever-rational choices. Th
methodology has had many uses and undeniably has charm for economists, but
rests on the shaky foundation of an implausible and untested assumption. In thi
column, we discuss a version of the utility maximization hypothesis that can b
tested-and we find that it is false.
Our analysis begins with a distinction between two senses of the term utility.
Decision utility has also been called “wantability”; it is inferred from choices and used
to explain choices. In contrast, experienced utility refers to the hedonic experience
m Daniel Kahneman is Eugene Higgins Professor of Psychology and Professor of Public
Affairs, Woodrow Wilson School, both at Princeton University, Princeton, New Jersey. Richard
H. Thaler is 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.
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222 Journal of Economic Perspectives
associated with an outcome. This is the meaning of utility that Jeremy Bentham
introduced, and it was mostly retained by the economists of the nineteenth century.
Edgeworth’s Mathematical Psychics (1871), for example, was quite explicit about this,
and even defined happiness as the temporal integral of momentary experienced
utility. But the notion of utility as an aspect of experience essentially disappeared
from economic discourse at the beginning of the twentieth century, when utility
came to be construed as decision utility.
In the older interpretation of utility, the question of whether choices maximize
utility has a simple meaning: do people choose the options that they will most
enjoy1 In modern decision theory, which ignores the distinction, the question is
quite different: are preferences consistent with each other and with the axioms of
rational choice1 A long series of modern challenges to utility theory, starting with
the paradoxes of Allais (1953) and Ellsberg (1961) and including framing effects,
have demonstrated inconsistency in preferences. This column reviews empirical
challenges to utility maximization, which return to the old question of whether
preferences optimize the experience of outcomes; for an early treatment along
these lines, see Kahneman (1994). 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 assume that when making a choice at time to, the consumer makes a
forecast of the utility of an outcome that will be experienced at a later time t1. These
forecasts of utility, which we call hedonic forecasts, may be explicit (and thus
observable) or implicit, in which case they must be inferred from the agent’s
choices at to. Systematic errors of hedonic forecasting can be demonstrated in
several ways: by comparing hedonic forecasts with direct measures of experienced
utility; by creating situations in which choices lead to demonstrably inferior experiences; and by showing that hedonic forecasts or choices are influenced by factors
that are clearly irrelevant.
Consider the example of a very hungry shopper (he missed lunch) doing his
weekly shopping at a grocery store late one Monday afternoon. If his current state
of hunger induces him to buy an overly large dinner portion for consumption later
in the week (on a day when he will eat his normal lunch at the office) then he has
made a forecasting error that has led to a bad choice. As we illustrate below, such
forecasting errors can arise for a variety of reasons. Most hedonic forecasting is
done intuitively rather than carefully considered, and forecasts are susceptible to
the biases found in other intuitive judgments (Kahneman, 2003; Gilovich, Griffin
and Kahneman, 2004). Unlike the products of deliberate and conscious reasoning
activity (such as the process that produces the answer to the question 17 X 24 = 1),
intuitive judgments express impressions (or feelings or immediate preferences)
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Daniel Kahneman and Richard H. Thaler 223
that come spontaneously to mind. In the jargon of psychology, such thoughts are
labeled highly accessible.
A process of substitution is involved in many of the heuristics that govern
intuitive thinking. When people confront a difficult question, the answer to a
related question will often come to mind first. The accessible answer may be
adopted as the required answer without the individual ever becoming aware that
the wrong question has been answered (Kahneman, 2003). For example, the
choices of the hungry shopper who salivates at the sight of enticing food items may
express his current aroused state, rather than a dispassionate forecast of his
appetite on Thursday evening. In many cases, the substitute answer is only one of
the determinants of the final judgment or decision. However, the net outcome of
substitution is a directional bias, known as anchoring, toward the highly accessible
response to a question that was not asked.
We consider an individual who makes a decision at time to that will affect
consumption at some later time t1. The context and mental state of the individual
at to influences the intuitive evaluations that will come to mind when the decision
is made. If the circumstances at t, and to differ, judgments and decisions that reflect
the state at to are likely to be biased. An early study provides a simple example.
Subjects tasted a spoonful of plain yogurt and immediately rated their experience.
They were then asked to predict how they would rate the experience of consuming
a full cup of the same yogurt. A strong anchoring effect was observed: most subjects
erroneously predicted that they would rate the experience of a full cup the same as
they had just rated the spoonful. They evidently failed to anticipate that ingesting
a substantial amount of a disliked substance is distinctly worse than a single swallow.
To be clear, we do not claim that people do not know what they like. They do,
when t, immediately follows to and when the experience is familiar: we are rarely
surprised by the taste of the second spoonful from a bowl of soup. However, people
do not always know what they will like, and they are likely to err most severely when
the temporal gap is long and when the agent’s state and circumstances vary
between t1 and to. In this column 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 to 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.
Effects of the Current Emotional State
The “hungry shopper” example illustrates a proposition that has been system-
atically explored in numerous studies: forecasts of future hedonic and emotional
states are anchored in the current emotional and motivational state. The outcome
has been labeled a “projection bias” (Loewenstein, O’Donoghue and Rabin, 2003)
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224 Journal of Economic Perspectives
since consumers are seemingly projecting their current mental state onto a future
one. In particular, Loewenstein has documented what he calls a “hot-cold empathy
gap.” When aroused-by hunger, sex or anger-people mispredict how they will
behave in a “cool” state, and when cool they mispredict the influence of arousal. In
both situations they underestimate the impact of a change from their current state.
The hungry shopper is not hypothetical. It is well-established that shoppers
who are hungry tend to buy food as if they expected to remain permanently
famished (Nisbett and Kanouse, 1968), but shoppers who are given a muffin to eat
before entering the supermarket are more likely to restrict their shopping to the
items on their list (Gilbert, Gill and Wilson, 1998). The effect is easily explained:
the attractiveness of food increases with current hunger. Of course, the delicacy (or
bag of potato chips) that appears irresistibly succulent to the hungry shopper may
have lost much of its charm when it is consumed later. Similar effects have been
found for other motives. For example, Badger, Bickel, Giordano, Jacobs, Loewenstein and Marsch (2004) documented a projection bias in a study of heroin addicts.
Addicts who had not yet received a dose of a heroin substitute Buprenorphine
(BUP) were willing to pay significantly more for an extra dose, due to be delivered
five days later, than were addicts who had just received their dose of BUP and were
temporarily in a drug-satiated state. In a more mundane context, Colin,
O’Donoghue and Vogelsang (2004) find that catalogue shoppers ordering by
telephone are overly influenced by the current weather, and prone to buy items
they will not want later. For example, warm clothes purchased on very cold days are
more likely to be subsequently returned.
Another demonstration of projection bias is provided by Read and Van Leeuwen (1998), who offered office workers a choice between a healthy and an unhealthy snack (fruit versus candy bar) to be delivered in a week, either at a time
when the workers would expect to be hungry (late afternoon) or full (right after
lunch). Some workers made this choice when they were hungry, others when full.
There are two main findings. First, workers are more likely to opt for the naughty
snack if it will be delivered when they expect to be hungry. This choice expresses a
correct hedonic forecast: hungry people are indeed more likely than sated people
to choose candy over fruit for immediate consumption. However, the workers were
also more likely to choose the unhealthy snack when they were hungry at the time of
making the choice.
The projection bias implies a violation of utility maximization, because it is
highly unlikely that the enjoyment of the snack next week will be influenced by the
level of hunger at the moment of choice. Anchoring on the present state also causes
errors if the salience of different aspects of an outcome is not the same when it is
chosen and when it is experienced. The purchase of membership in sports clubs
provides an example. The health benefits are the focus of attention at the time of
purchase, but other considerations are likely to be more salient when the question
is whether to visit the club. The failure to anticipate these shifts of salience may
contribute to many purchases of memberships by people who later make little or no
use of them (Della Vigna and Malmendier, forthcoming).
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Anomalies: Utility Maximization and Experienced Utility 225
More generally, some virtuous choices that people make may involve a lack of
empathy for the future self who will have to live with the choice. In an elegant
demonstration of this phenomenon, Read, Loewenstein and Kalyanaraman (1999)
provided experimental participants with coupons that allowed them free rental of
several films. Films of two types were available: some were edifying or “highbrow”
(like Schindler’s List) while others were lowbrow and fun (Sleepless in Seattle). The
films were to be available either for the same evening or for the next day. Subjects
tended to select lowbrow movies for viewing tonight and highbrow movies for
tomorrow. The desire to improve one’s mind is apparently more salient when
choosing a movie for later, while the desire to relax is more salient when choosing
for the very near future. It is unlikely that these conflicting choices are both utility
maximizing.
Effects of the Context of Choice
The main strategy of the studies we discuss in this section involves a search for
differences between the state of the individual at time to and t1, which may cause
discrepancies between the utility of a good in decision or forecast and its utility in
actual experience. Two aspects of the task that is performed at to have been
investigated as a source of such discrepancies: whether the task requires the
evaluation of a single good or a comparison of the values of two competing goods;
and whether a decision involves multiple goods that will be consumed at different
times.
A good may be evaluated in explicit comparison with other goods (joint
evaluation) or on its own (separate evaluation). The preference ranking of two goods
may be different when they are compared explicitly to each other (joint evaluation)
or evaluated separately, perhaps by willingness to pay or by a rating. Hsee (2000)
has documented one of the mechanisms that produce such reversals of preference:
subtle differences between goods (like two shades of purple) may be highly
noticeable when the goods are directly compared, but the same differences may be
completely undetectable when the goods are evaluated separately. The salience of
attributes of a good can therefore be quite different in joint and in separate
evaluation.
Hsee (2000) observed that the context in which consumers make choices is
likely to induce similar reversals, because consumers often make choices in joint
evaluation (for example when comparing televisions at a store), but subsequently
experience only the option they chose. He offered a compelling thought experiment to illustrate the point. Imagine that you are in the market for stereo speakers
and that you are comparing various models at the home audio store. You narrow
your choice down to two similarly priced models, A and B. The A speakers sound
somewhat better than the B speakers, but are quite ugly. Which do you choose1 At
the store you engage in joint evaluation, comparing one model against another.
Furthermore, your attention is likely to be focused on the quality of the sound and
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226 Journal of Economic Perspectives
you may assign considerable weight to small differences in this attribute. But your
task is to predict the utility you will derive from the speakers when you listen to
music at home. At home there will be just one set of speakers, so you will be
performing a separate evaluation. Small differences in sound quality will not be
noticeable without a standard of comparison. In contrast, comparison is not
required to evaluate whether an object is ugly or beautiful. Consumers are therefore susceptible to the mistake that Hsee described, paying too much attention to
the small (but noticeable in the store) difference in sound quality and too little
attention to appearance.
Comparative effects can arise even when the task does not explicitly require it.
Volunteers in a study conducted by Morewedge, Gilbert and Myrseth (2005) were
asked to predict how much they would enjoy eating potato chips a few minutes
later. In one experimental condition subjects could also see a chocolate bar next to
the potato chips; in another condition the chocolate was replaced by a tin of
sardines. The irrelevant foods influenced the participants’ predictions of their
future enjoyment, which was reduced by the presence of the chocolate (subjects
prefer chocolate to chips to sardines). The prediction was comparative, although
no comparison was required. Actual enjoyment of the chips, however, was completely unaffected by the irrelevant food that remained on the table. The experi-
ence of eating is focused on the food one consumes and is not comparative.
A different type of discrepancy between the context of choice and the context
of experience arises when people make a simultaneous choice about goods that will
be consumed sequentially. An example is the choice of which CDs to load into the
stack of a CD player (Read, Antonides, van den Ouden and Trienekens, 2001). The
construction of a sequence inevitably highlights the attribute of variety (in the case
of CDs, variety of singers or of types of music). However, the variety of a sequence
is usually less salient in the experience of consumption. As a consequence, people
often choose more variability than they will actually enjoy. Variety is also less salient
when the elements of the sequence are chosen one at a time than when they are
chosen all at once.
In the first demonstration of this phenomenon (Simonson, 1990), student
chose three snacks from a menu of six alternatives (like Snickers bars and Or
cookies), one snack for each of three class sessions. Students in the simultaneou
choice group chose all three snacks during the first session, while the sequenti
choice group chose a single snack in each session. Simultaneous-choice subjects
typically took a different snack for each class, while sequential-choice subjects often
wanted the same snack every time. Here again, the highly accessible answer t
question that has not been asked appears to dominate the decision. Imagin
one’s tastes in a week is cognitively more demanding than consulting one’s curr
inclinations, and the unasked question is whether the participant would want th
helpings of the same snack right now, or would prefer some variety. Simonson
Winer (1992) found similar behavior in actual purchases. Families who purcha
the same number of tubs of yogurt took more variety in flavors if they purch
them in one shopping trip than in several trips.
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Daniel Kahneman and Richard H. Thaler 227
Read and Loewenstein (1995) introduced the term diversification bias to refer
to the excess variety-seeking in simultaneous choice. The term implies that sequen-
tial choice leads to higher experienced utility. This prediction was confirmed in
several studies in which participants reported their enjoyment of decisions made
either simultaneously or sequentially. For example, participants in a study by Read,
Antonides, van den Ouden and Trienekens (2001) chose two audio tracks (music
or comedy) either sequentially or simultaneously. They chose more variety in
simultaneous choice, but they enjoyed high-variety sets less than low-variety ones.
The authors proposed that simultaneous decisions cause the attribute of variety to
be much more salient in simultaneous choice than it will be at the time of actual
consumption. One reason for this is that two items in the same category (say albums
by U2 and the Rolling Stones, both rock bands) may appear quite similar when
considered in the broad context of all music, includingjazz, classical and so on, but
will be still be quite distinctive when experienced in immediate succession.
Learning from the Past
Consumers’ choices often involve experiences they have already had, as in
visiting a restaurant with a familiar menu. Preferences and hedonic forecasts are
informed by personal memory in these cases and might therefore be expected to be
extremely accurate. Indeed, choices from a familiar menu do not yield many
hedonic surprises. However, hedonic forecasts that are based on stored evaluations
of past encounters will be biased if these memories are biased, and several sources
of such biases of remembered utility have been established. Like forecasts of the
future, evaluations of the past are anchored on the individual’s emotional state
when the evaluation is made (Stone, Broderick, Porter and Kaell, 1997). In addition, global evaluations of extended outcomes systematically overweight some parts
of the experience and underweight others. These biases produce compelling
violations of utility maximization.
Biased evaluations of past episodes were documented in a series of early
experiments in which participants reported retrospective evaluations of experiences that varied in both hedonic value and duration: for example, pleasant or
horrific films, annoyingly loud sounds and painful medical procedures (Schreiber
and Kahneman, 2000). In most of these experiments, the participants also provided
a continuous or intermittent report of the quality of their current experience, using
a joystick or answering periodic questions. A robust finding of the retrospective
evaluations collected in these studies was labeled duration neglect: retrospective
evaluations of episodes were radically insensitive to variations of duration. Subjects’
retrospective evaluations of both pleasant and unpleasant experiences were wellexplained by a peak/end rule. a simple average of the quality of the experience at its
most extreme moment and at its end predicted retrospective evaluations with
substantial accuracy.
The peak/end rule violates an elementary principle of rational evaluation,
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228 Journal of Economic Perspectives
temporal monotonicity, which asserts that increasing the duration of a painful episode
does not improve its overall utility. By the peak/end rule, however, extending a
period of pain can improve its remembered utility if the peak is unchanged and the
new end is less aversive than the original. To demonstrate this result, Kahneman,
Fredrickson, Schreiber and Redelmeir (1993) paid experimental participants to
undergo three trials of an experience called the cold-pressor, in which a hand is
immersed to the wrist in painfully cold water and kept there until the experimenter
announces that it may be removed. The first two trials were conducted as follows.
In the Short trial, a hand was immersed in water at 141C for 60 seconds. In the Long
trial, the hand was also immersed at 141C for 60 seconds, and then over the next
30 seconds, the temperature was gradually raised to 151C. The two trials were
separated by seven minutes, and their order was counterbalanced across subjects.
The participants continuously indicated the intensity of the pain they experienced,
using ajoystick. The mean of reported pain intensity in both conditions was 8.4 on
a scale of 0-14 after 60 seconds, which is when the Short trial ended. When the
Long trial ended, mean reported pain was only 6.5, still somewhat painful, but a
distinct improvement of the peak/end average.
Seven minutes after the second trial, the participant was asked to choose which
of the two experiences would be repeated for the third trial. Overall, 22 of
32 participants elected to repeat the Long trial, which exposed them to 30 seconds
of pain they could have avoided. The proportion of choices of the Long trial was
80 percent (17/21) among the participants who indicated diminishing pain during
the last 30 seconds of that trial. The remaining 11 participants, who had indicated
no change in pain, divided their choices about equally between the Long and the
Short trial. Both results are predicted by the peak/end rule.
Similar violations of temporal monotonicity have been observed in diverse
settings. For example, a clinical trial of colonoscopy was conducted in which half
the patients were randomly exposed to a condition in which their colonoscopy was
extended by keeping the instrument stationary for about a minute before removing
it (Redelmeier, Katz and Kahneman, 2003). The extra period was uncomfortable,
but not very painful.1 This manipulation resulted in a highly significant improve-
ment of retrospective judgments of the pain of the procedure and in a marginal
increase in the observed frequency of repeat colonoscopies within the subsequent
five years. Violations of dominance were also found in choices between episodes of
annoyingly loud noise (Schreiber and Kahneman, 2000): adding a period of mildly
reduced loudness to an unpleasant noise made it less aversive in memory and more
likely to be chosen for repetition.
The violations of temporal monotonicity in these experiments are not intentional. Subjects recognize the validity of this rule and conform to it if their attention
is appropriately directed. Indeed, experimental participants prefer the Short cold-
1 These experiments were conducted before it became common practice to sedate patients heavily. We
are cheerfully able to reassure anyone being urged their doctor to undergo this procedure that “you
won’t feel a thing.”
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Anomalies: Utility Maximization and Experienced Utility 229
pressor trial over the Long one when the two trials are verbally described. When
they choose on the basis of their memories, however, their preferences reflect the
neglect of duration as a factor in the evaluation of past episodes.
Mispredicting Adaptation
People must sometimes predict the hedonic effect of a long-term change in life
circumstances. Social psychologists Daniel Gilbert and Timothy Wilson originally
coined the term “affective forecasting” to describe this mental activity. Many of the
changes that people make in their life circumstances are driven by the wish to
improve their happiness or reduce their unhappiness and inevitably invoke some
idea of the hedonic effects of these circumstances. People forecast the happiness or
misery of acquaintances who marry, of couples who divorce, of professors who get
tenure and others who do not, of people who move from the Midwest to California
or others who move in the opposite direction. People also have strong intuitions
about the effects on well-being of being rich or poor, obese or athletic, old or
young. These intuitions and forecasts may be relevant to decisions about jobs,
marriage, divorce and moving to California. As Gilbert and Wilson (2000) noted,
mistakes of affective forecasting can cause erroneous choices, which they called
“miswanting.”
The central result of many explorations of affective forecasting and of intuitive
theories about well-being has been described as a “focusing illusion,” which
Schkade and Kahneman (1998) summarized by a maxim: “Nothing in life matters
quite as much as you think it does while you are thinking about it.” In other words,
there is a powerful tendency to exaggerate the importance of any aspect of life
when one focuses attention on it. The bias is easily explained. The task of evaluating
the impact of a change in life circumstances inevitably draws attention to the
distinctive aspects of the change. For example, thoughts of climate are very likely to
be salient in considering a move to California, or in evaluating a proposition such
as “people are happier in California.” But this selective focus is likely to bias
judgments, for at least two reasons: 1) as in the projection bias, forecasts made
when attention is focused on some attribute of an outcome are likely to be in error
if attention is not directed to the same attribute at the critical time in the future; and
2) affective forecasts almost always deal with outcomes that will not remain at the
focus of attention forever.
Schkade and Kahneman (1998) observed a focusing illusion in investigating a
question many of us who live in the East or Midwest have wondered about: would
we be happier if we lived in California1 They polled students at two large Midwest
universities and two large southern California universities. The students were asked
a series of questions about life satisfaction, either about themselves or “a student
with your values and interests” at one of the other universities. Respondents in both
California and the Midwest believed that students in California would be significantly happier, yet self-reported happiness was virtually identical in the two
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230 Journal of Economic Perspectives
locations. The explanation is straightforward: When asked to report on their
well-being, people normally focus on more central aspects of life and pay little
attention to the climate. When they try to imagine the happiness of someone in a
different location, however, dimensions on which the regions differ will loom large.
Climate is therefore more important in affective forecasts than in actual well-
being–hence the bias.2
The focusing illusion helps resolve two central puzzles in the study of wellbeing. The first puzzling observation is that people often adapt surprisingly well to
important changes in their lives, even such dramatic changes as becoming a
paraplegic or winning the lottery. These events may have large immediate effects
on well-being or misery, but the effects tend to be short-lived. The second puzzling
observation is that the first is surprising. Although adaptation is ubiquitous, it is
poorly represented in the naive theory of well-being from which affective forecasts
are drawn. Unless they knew a paraplegic personally, for example, respondents in
an experiment described by Kahneman (2000) made similar predictions of the
mood of a paraplegic, regardless of whether they were told that the individual had
been paralyzed for only a month or for a whole year. The same insensitivity to time
was observed when respondents predicted the mood of lottery winners. Here
again-unless they knew a lottery winner personally-respondents predicted the
same level of euphoria for lottery winners a month or a year after the event. In both
situations the pattern of responses was quite different for respondents who had
personal knowledge of a relevant case. Personal knowledge was not a significant
factor in predictions of the initial misery of paraplegics and the initial bliss of lottery
winners-we suspect that naive predictions of the initial emotional response to
significant events are often accurate. However, only the better-informed respondents kne