On the Origin of Utility, Weighting, and Discounting Functions: How They Get Their Shapes and How to Change Their Shapes

Abstract

We present a theoretical account of the origin of the shapes of utility, probability weighting, and temporal discounting functions. In an experimental test of the theory, we systematically change the shape of revealed utility, weighting, and discounting functions by manipulating the distribution of monies, probabilities, and delays in the choices used to elicit them. The data demonstrate that there is no stable mapping between attribute values and their subjective equivalents. Expected and discounted utility theories, and also their descendants such as prospect theory and hyperbolic discounting theory, simply assert stable mappings to describe choice data and offer no account of the instability we find. We explain where the shape of the mapping comes from and, in describing the mechanism by which people choose, explain why the shape depends on the distribution of gains, losses, risks, and delays in the environment. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1853 . This paper was accepted by Yuval Rottenstreich, judgment and decision making.

Winning and losing: Effects on impulsive action.

“…Again, this pattern is inconsistent with the idea that people become more cautious after a loss. However, our p gamble results are consistent with previous studies (see the introduction), and support the idea that subjective value or utility of options is context dependent and highly malleable (Stewart, Reimers, & Harris, 2015; Vlaev, Chater, Stewart, & Brown, 2011). For example, several models of decision-making assume that the subjective value of an option depends on immediately preceding gains and losses (for a short review, see Smith et al, 2009).…”

On the External Validity of Social Preference Games: A Systematic Lab-Field Study

“…After all, experimental economics and psychology have widely documented that subtle differences in the context can have profound effects on how people behave (e.g., Ross and Ward 1996;Cherry et al 2002;Ariely et al 2006;List 2007;Bardsley 2008;Stewart et al 2015). This conclusion seems further reinforced by the fact that we did not find a significant correlation between our self-report measure of past social behaviors (the SRA scale) and behavior in our field situations.…”

“…All these factors have been shown to matter, at least in some cases, which calls into question the idea that behavior in experimental social preference games can be immediately representative of social behavior outside the lab. The role of the context is perhaps especially problematic, given that typical social preference games are meant to be as context-free as possible, while much research in experimental economics and psychology has shown that preferences seem to be significantly shaped by the context in which they are elicited (see, e.g., Slovic 1995;Loewenstein 1999;Ariely, Loewenstein, and Prelec 2006;Lichtenstein and Slovic 2006;Stewart, Reimers, and Harris 2015).…”

Framing effects in intertemporal choice: A nudge experiment

“…In the area of intertemporal choice, which is the focus of this paper, the framing of decisions has been also found to bias decision-making, intertemporal trade-off between current and future consumption, through different mechanisms (e.g., Benzion, Rapoport and Yagil, 1989;Loewenstein and Prelec, 1992;Read, Frederick, and Scholten, 2013;Stewart, Reimers, and Harris, 2014;Weber et al, 2007; for interesting background information, see Elliott and Hayward, 1998). Again, people appear to represent future payoffs as gains or losses from a reference point, but also past or future consumption and even others' choices (Loewenstein, 1988; see also, for instance, Epley and Gneezy, 2007).…”