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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
more pleasure has a higher utility than one that gives less pleasure. In principle, this experienced utility (Kahneman, 1999) can be assessed by measuring the degree to which a person is pleased or displeased at the time of the experience. Although common sense suggests that past experiences drive future behavior, the relationship is more complex. Individuals’ choices are based on predicted utility, that is, expected pleasure or pain, for which people draw on memories of previous experiences, that is, the event’s remembered utility. Unfortunately, experienced utility and remembered utility are not always closely related.
As an example, consider an experiment by Kahneman et al. (1993), who had participants go through two painful experiences of different duration. In a short trial, participants immersed one hand in painfully cold water (14°C) for 60 seconds. In a long trial, they went through the same experience, but kept their hand in the water for an additional 30 seconds, during which the water’s temperature increased from 14°C to 15°C, a temperature that is still within the range of pain, as confirmed by contemporaneous reports. Accordingly, the long trial entailed the same 60 seconds of intense pain as the short trial, plus an additional 30 seconds of less intense pain. Nevertheless, participants retrospectively evaluated the longer trial as less painful, exhibiting a bias known as “duration neglect.” This bias refers to the observation that people evaluate extended episodes by drawing primarily on two data points, the peak and the end, and largely neglect the overall duration of the episode. Hence, adding a better ending to the otherwise identical experience made the longer episode seem less unpleasant. In conceptual terms, the remembered (dis)utility (pain) of the longer trial is lower than its experienced (dis)utility. Following both experiences, participants were asked which one they wanted to repeat in a third trial. In contrast to common sense and the predictions of consumer behavior theory, a majority chose the longer trial, voluntarily exposing themselves to 60 seconds of intense pain plus 30 seconds of milder pain, instead of the merely 60 seconds of intense pain of the short trial. Apparently, their reliance on the peak and end of both pain episodes led them to prefer the episode with a milder ending, even though it entailed a longer exposure to painful stimulation. Aside from demonstrating that people learn from memories and not from experiences per se, findings of this type highlight the pitfalls of inferring utility from choice.
In contrast to core assumptions of the economic theory of consumer behavior, experimental research in psychology and decision making indicates that choice, or revealed preference, is at best an imperfect measure of experienced utility. Choices are often based on erroneous assumptions, always dependent on the given context, and frequently fail to increase experienced utility even when the consumer has abundant experience with the product of choice (for a review, see Loewenstein and Schkade, 1999). Hence, decision utility, that is, the weight assigned to the desirability of an outcome in the context of a specific decision, is only weakly related to experienced utility in the Bentham sense.