Journal of Happiness Studies

, Volume 15, Issue 4, pp 937–956 | Cite as

Economic Consequences of Mispredicting Utility

  • Bruno S. Frey
  • Alois Stutzer
Research Paper


In a simple conceptual framework, we organize a multitude of phenomena related to the (mis)prediction of utility. Consequences in terms of distorted choices and lower well-being emerge if people have to trade-off between alternatives that are characterized by attributes satisfying extrinsic desires and alternatives serving intrinsic needs. Thereby the neglect of asymmetries in adaptation is proposed as an important driver. The theoretical analysis is consistent with econometric evidence on commuting choice using data on subjective well-being. People show substantial adaptation to a higher labor income but not to commuting. This may account for the finding that people are not compensated for the burden of commuting.


Adaptation Extrinsic/intrinsic attributes Individual decision-making Misprediction Subjective well-being Time allocation 

JEL Classification

A12 D11 D12 D84 I31 J22 



We are grateful for helpful remarks to this and previous versions of the paper from Roland Bénabou, Matthias Benz, Marina Bianchi, Rafael Di Tella, Ed Diener, Paul Dolan, Richard Easterlin, Bob Frank, Paul Frijters, Klaus Foppa, Ralph Hertwig, Christopher Hsee, Danny Kahneman, Tim Kasser, David Laibson, Rafael Lalive, Richard Layard, Ed Lazear, Robert MacCulloch, Willi Meyer, Felix Oberholzer, Andrew Oswald, Mirjam Plantinga, Maurizio Pugno, Jason Riis, Wolfgang Stroebe and participants at the annual meeting of the American Economic Association, the European Economic Association, the German Economic Association and the Swiss Society of Economics and Statistics, as well as at the International Conferences on Hedonic Adaptation and Prediction in Harvard and on Adaptation and Reference Values at Brunel Univeristy, the Brookings/Warwick Conference on “Why Inequality Matters: Lessons for Policy from the Economics of Happiness” in Washington, a public lecture at Princeton University and the conference “Economics Meets Psychology” in Frankfurt. Data for the German Socio-Economic Panel has been kindly provided by the German Institute for Economic Research (DIW) in Berlin.


  1. Alonso, W. (1964). Location and land use: Toward a general theory of land rent. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
  2. Bandura, A. (1977). Self-efficacy: Toward a unifying theory of behavior change. Psychological Review, 84, 191–215.CrossRefGoogle Scholar
  3. Baumeister, R. F., Vohs, K. D., Aaker, J. L., & Garbinsky, E. N. (2013). Some key differences between a happy life and a meaningful life. Journal of Positive Psychology, forthcoming.Google Scholar
  4. Becker, G. S. (1965). A theory in the allocation of time. Economic Journal, 75(299), 493–517.CrossRefGoogle Scholar
  5. Benz, M., & Frey, B. S. (2004). Being independent raises happiness at work. Swedish Economic Policy Review, 11(2), 95–134.Google Scholar
  6. Bordalo, P., Gennaioli, N., & Shleifer, A. (2012). Salience theory of choice under risk. Quarterly Journal of Economics, 127(3), 1243–1285.CrossRefGoogle Scholar
  7. Brehm, J. W. (1966). A theory of psychological reactance. New York: Academic Press.Google Scholar
  8. Clark, A. E., Diener, E., Georgellis, Y., & Lucas, R. (2008). Lags and leads in life satisfaction: A test of the baseline hypothesis. Economic Journal, 118(529), F222–F243.CrossRefGoogle Scholar
  9. Clark, A. E., Georgellis, Y., & Sanfey, P. (2001). Scarring: The psychological impact of past unemployment. Economica, 68(270), 221–241.CrossRefGoogle Scholar
  10. Comerford, D. A. (2011). Attenuating focalism in affective forecast of the commuting experience: Implication for economic decisions and policy making. Journal of Economic Psychology, 32(5), 691–699.CrossRefGoogle Scholar
  11. Csikszentmihalyi, M. (1990). Flow: The psychology of optimal experience. New York: Harper Perennial.Google Scholar
  12. DeCharms, Ri. (1968). Personal causation. New York: Academic Press.Google Scholar
  13. Deci, E. L., & Ryan, R. M. (2000). The “what” and “why” of goal pursuits: Human needs and the self-determination of behavior. Psychological Inquiry, 11(4), 227–268.CrossRefGoogle Scholar
  14. Di Tella, R., Haisken-De New, J., & MacCulloch, R. (2010). Happiness adaptation to income and to status in an individual panel. Journal of Economic and Behavior Organization, 76(3), 834–852.CrossRefGoogle Scholar
  15. Di Tella, R., & MacCulloch, R. (2006). Some uses of happiness data in economics. Journal of Economic Perspectives, 20(1), 25–46.CrossRefGoogle Scholar
  16. Diener, E., Suh, E. M., Lucas, R. E., & Smith, H. L. (1999). Subjective well-being: Three decades of progress. Psychological Bulletin, 125(2), 276–303.CrossRefGoogle Scholar
  17. Easterlin, R. A. (2001). Income and happiness: Towards a unified theory. Economic Journal, 111(473), 465–484.CrossRefGoogle Scholar
  18. Easterlin, R. A. (2003). Building a better theory of well-being. In L. Bruni & P. L. Porta (Eds.), Economics and happiness: Framing the analysis (pp. 29–64). New York: Oxford University Press.Google Scholar
  19. Ferrer-i-Carbonel, A., & Frijters, P. (2004). The effect of methodology on the determinants of happiness. Economic Journal, 114, 641–659.CrossRefGoogle Scholar
  20. Frank, R. H. (1999). Luxury fever: Why money fails to satisfy in an era of excess. New York: Free Press.Google Scholar
  21. Frederick, S., & Loewenstein, G. (1999). Hedonic adaptation. In D. Kahneman, E. Diener, & N. Schwarz (Eds.), Well-being: The foundations of hedonic psychology (pp. 302–329). New York: Russell Sage Foundation.Google Scholar
  22. Frey, B. S. (1997). Not just for the money: An economic theory of personal motivation. Cheltenham, UK and Brookfield, USA: Edward Elgar.Google Scholar
  23. Frey, B. S., Benz, M., & Stutzer, A. (2004). Introducing procedural utility: Not only what but also how matters. Journal of Institutional and Theoretical Economics, 160(3), 377–401.CrossRefGoogle Scholar
  24. Frey, B. S., & Jegen, R. (2001). Motivation crowding theory: A survey of empirical evidence. Journal of Economic Surveys, 15(5), 589–611.CrossRefGoogle Scholar
  25. Frey, B. S., & Stutzer, A. (2001/2002). Economics and psychology: From imperialistic to inspired economics. Revue de Philosophie Economique, 4 5–22.Google Scholar
  26. Frey, B. S., & Stutzer, A. (2002). What can economists learn from happiness research? Journal of Economic Literature, 40(2), 402–435.CrossRefGoogle Scholar
  27. Frijter, P., Johnston, D. W., & Shields, M. A. (2011). Life satisfaction dynamics with quarterly life event data. The Scandinavian Journal of Economics, 113(1), 190–211.CrossRefGoogle Scholar
  28. Frijters, P., Shields, M. A., & Haisken-DeNew, J. P. (2004). Investigating the patterns and determinants of life satisfaction in Germany following reunification. Journal of Human Resources, 39(3), 649–674.CrossRefGoogle Scholar
  29. Gilbert, D. T., Pinel, E. C., Wilson, T. D., Blumberg, S. J., & Wheatley, T. P. (1998). Immune neglect: A source of durability bias in affective forecasting. Journal of Personality and Social Psychology, 75(3), 617–638.CrossRefGoogle Scholar
  30. Gilbert, D. T., & Wilson, T. D. (2009). Why the brain talks to itself: Sources of error in emotional prediction. Philosophical Transaction of the Royal Society B, 364, 1335–1341.CrossRefGoogle Scholar
  31. Graham, L., & Oswald, A. J. (2010). Hedonic capital, adaption and resilience. Journal of Economic Behavior and Organization, 76(2), 372–384.CrossRefGoogle Scholar
  32. Hsee, C. K., Rottenstreich, Y., & Stutzer, A. (2012). Suboptimal choice and the need for experienced individual well-being in economic analysis. International Journal of Happiness and Development, 1(1), 63–85.CrossRefGoogle Scholar
  33. Hsee, C. K., Zhang, J., Yu, F., & Xi, Y. (2003). Lay rationalism in decision making. Journal of Behavioral Decision Making, 16, 257–272.CrossRefGoogle Scholar
  34. Kahneman, D. (1999). Objective happiness. In D. Kahneman, E. Diener, & N. Schwarz (Eds.), Well-being: The foundations of hedonic psychology (pp. 3–25). New York: Russell Sage Foundation.Google Scholar
  35. Kahneman, D. (2003). Experienced utility and objective happiness: A moment-based approach. In I. Brocas & J. D. Carrillo (Eds.), The psychology of economic decisions, volume 1: Rationality and well-being (pp. 187–208). Oxford: Oxford University Press.Google Scholar
  36. Kahneman, D. (2011). Thinking, fast and slow. New York: Farrar, Strauss, Giroux.Google Scholar
  37. Kahneman, D., Diener, E., & Schwarz, N. (Eds.). (1999). Well-being: The foundation of hedonic psychology. New York: Russell Sage Foundation.Google Scholar
  38. Kahneman, D., & Thaler, R. H. (2006). Anomalies: Utility maximization and experienced utility. Journal of Economic Perspectives, 20(1), 221–234.CrossRefGoogle Scholar
  39. Kahneman, D., Wakker, P. P., & Sarin, R. (1997). Back to bentham? Explorations of experienced utility. Quarterly Journal of Economics, 112(2), 375–405.CrossRefGoogle Scholar
  40. Kasser, T., & Ryan, R. M. (1996). Further examining the American dream: Differential correlates of intrinsic and extrinsic goals. Personality and Social Psychology Bulletin, 22(3), 280–287.CrossRefGoogle Scholar
  41. Keeney, R. L., & Raiffa, H. (1976). Decisions with multiple objectives. New York: Wiley.Google Scholar
  42. Koslowsky, M., Kluger, A. N., & Reich, M. (1995). Commuting stress: Causes, effects, and methods of coping. New York: Plenum Press.CrossRefGoogle Scholar
  43. Kuttner, R. (1997). Everything for sale: The virtues and limits of markets. New York: Knopf.Google Scholar
  44. Lancaster, K. J. (1966). A new approach to consumer theory. Journal of Political Economy, 74(2), 132–157.CrossRefGoogle Scholar
  45. Lane, R. E. (1991). The market experience. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  46. Layard, R. (2005). Happiness: Lessons from a new science. New York: Penguin.Google Scholar
  47. Lebergott, S. (1993). Pursuing happiness: American consumers in the twentieth century. Princeton, NJ: Princeton University Press.Google Scholar
  48. Loewenstein, G., & Adler, D. (1995). A bias in the prediction of tastes. Economic Journal, 105, 929–937.CrossRefGoogle Scholar
  49. Loewenstein, G., O’Donoghue, T., & Rabin, M. (2003). Projection bias in predicting future utility. Quarterly Journal of Economics, 118(4), 1209–1248.CrossRefGoogle Scholar
  50. Loewenstein, G., & Schkade, D. (1999). Wouldn’t it be nice? Predicting future feelings. In D. Kahneman, E. Diener, & N. Schwarz (Eds.), Well-being: The foundation of hedonic psychology (pp. 85–105). New York: Russell Sage Foundation.Google Scholar
  51. Luhman, M., Hofmann, W., Eid, M., & Lucas, R. E. (2012). Subjective well-being and adaptation to life events: A meta-analysis. Journal of Personality and Social Psychology, 102(3), 592–615.CrossRefGoogle Scholar
  52. Maslow, A. (1968). Toward a psychology of being (2nd ed.). New York: Van Nostrand.Google Scholar
  53. Meier, S., & Stutzer, A. (2008). Is volunteering rewarding in itself? Economica, 75(1), 39–59.Google Scholar
  54. Moses, L. N. (1962). Towards a theory of intra-urban wage differentials and their influence on travel patterns. Papers and Proceedings of the Regional Science Association, 9, 53–63.CrossRefGoogle Scholar
  55. Novaco, R. W., Stokols, D., & Milanesi, L. C. (1990). Subjective and objective dimensions of travel impedance as determinants of commuting stress. American Journal of Community Psychology, 18, 231–257.CrossRefGoogle Scholar
  56. Oswald, A., & Powdthavee, N. (2008). Does happiness adapt? A longitudinal study of disability with implications for economists and judges. Journal of Public Economics, 92(5–6), 1061–1077.CrossRefGoogle Scholar
  57. Prelec, D., & Herrnstein, R. J. (1991). Preferences or principles: Alternative guidelines for choice. In R. J. Zeckhauser (Ed.), Strategy and choice. Cambridge: MIT Press.Google Scholar
  58. Pugno, M. (2013). Scitovsky and the income-happiness paradox. Journal of Socio-Economics, 43(2), 1–10.CrossRefGoogle Scholar
  59. Rayo, L., & Becker, G. S. (2007). Evolutionary efficiency and happiness. Journal of Political Economy, 115(2), 302–337.CrossRefGoogle Scholar
  60. Roberts, J., Hodgson, R., & Dolan, P. (2011). “It’s driving her mad”: Gender differences in the effects of commuting on psychological health. Journal of Health Economics, 30(5), 1064–1076.CrossRefGoogle Scholar
  61. Robinson, M. D., & Clore, G. L. (2002). Belief and feeling: Evidence for an accessibility model of emotional self-report. Psychological Bulletin, 128(6), 934–960.CrossRefGoogle Scholar
  62. Robson, A., & Samuelson, L. (2011). The evolution of decision and experienced utilities. Theoretical Economics, 6(3), 311–339.CrossRefGoogle Scholar
  63. Rogers, C. (1961). On becoming a person. Boston: Houghton Mifflin.Google Scholar
  64. Ross, M. (1989). Relation of implicit theories to the construction of personal histories. Psychological Review, 96, 341–357.CrossRefGoogle Scholar
  65. Scitovsky, T. (1976). The joyless economy: An inquiry into human satisfaction and dissatisfaction. Oxford: Oxford University Press.Google Scholar
  66. Seligman, M. E. P. (1992). Helplessness: On depression, development, and death. New York: Freeman.Google Scholar
  67. Shafir, E., Simonson, I., & Tversky, A. (1993). Reason-based choice. Cognition, 49(2), 11–36.CrossRefGoogle Scholar
  68. Simonsohn, U. (2006). New-yorkers commute more everywhere: Contrast effects in the field. Review of Economics and Statistics, 88(1), 1–9.CrossRefGoogle Scholar
  69. Sirgy, M. J. (1997). Materialism and quality of life. Social Indicators Research, 43(3), 227–260.CrossRefGoogle Scholar
  70. Statistisches Bundesamt Deutschland (2006). Unterbeschäftigung nimmt zu: Jeder siebte Erwerbstätige möchte mehr Arbeit. Press Release No. 131, 24 Mar 2006.Google Scholar
  71. Stutzer, A. (2004). The role of income aspirations in individual happiness. Journal of Economic Behavior and Organization, 54(1), 89–109.CrossRefGoogle Scholar
  72. Stutzer, A., & Frey, B. S. (2004). Reported subjective well-being: A challenge for economic theory and economic policy. Schmollers Jahrbuch, 124(2), 1–41.Google Scholar
  73. Stutzer, A., & Frey, B. S. (2006). Does marriage make people happy, or do happy people get married? Journal of Socio-Economics, 35(2), 326–347.CrossRefGoogle Scholar
  74. Stutzer, A., & Frey, B. S. (2008). Stress that doesn’t pay: The commuting paradox. Scandinavian Journal of Economics, 110(2), 339–366.CrossRefGoogle Scholar
  75. Stutzer, A., & Frey, B. S. (2010). Recent advances in the economics of individual subjective well-being. Social Research: An International Quarterly, 77(2), 679–714.Google Scholar
  76. Tatzel, M. (2002). “Money worlds” and well-being: An integration of money dispositions, materialism and price-related behavior. Journal of Economic Psychology, 23, 103–126.CrossRefGoogle Scholar
  77. Thaler, R. H. (1999). Mental accounting matters. In D. Kahneman & A. Tversky (Eds.), Choices, values and frames (pp. 241–268). Cambridge: Cambridge University Press.Google Scholar
  78. Tiebout, C. M. (1956). A pure theory of local expenditure. Journal of Political Economy, 64(5), 416–424.CrossRefGoogle Scholar
  79. Timothy, D., & Wheaton, W. C. (2001). Intra-urban wage variation, employment location, and commuting times. Journal of Urban Economics, 50(2), 338–366.CrossRefGoogle Scholar
  80. Tyler, T. R., Huo, Y. J., & Lind, E. A. (1999). The two psychologies of conflict resolution: differing antecedents of pre-experience choices and post-experience evaluations. Group Processes and Intergroup Relations, 2(2), 99–118.CrossRefGoogle Scholar
  81. van Herwaarden, F., Kapteyn, A., & van Praag, B. M. S. (1977). Twelve thousand individual welfare functions: A comparison of six samples in Belgium and The Netherlands. European Economic Review, 9(3), 283–300.CrossRefGoogle Scholar
  82. van Ommeren, J. (2000). Commuting and relocation of jobs and residences. Aldershot: Ashgate.Google Scholar
  83. van Ommeren, J., Rietveld, P., & Nijkamp, P. (1997). Commuting: In search of jobs and residence. Journal of Urban Economics, 42, 402–421.CrossRefGoogle Scholar
  84. van Praag, B. M. S. (1993). The relativity of the welfare concept. In M. Nussbaum & A. K. Sen (Eds.), The quality of life (pp. 362–416). Oxford: Clarendon.CrossRefGoogle Scholar
  85. Weinberg, D. H., Friedman, J., & Mayo, S. K. (1981). Intraurban residential mobility: The role of transactions costs, market imperfections, and household disequilibrium. Journal of Urban Economics, 9(3), 332–348.CrossRefGoogle Scholar
  86. Welsch, H., & Kühling, J. (2011). Are pro-environmental consumption choices utility-maximizing? Evidence from subjective well-being data. Ecological Economics, 72, 75–87.CrossRefGoogle Scholar
  87. White, R. W. (1959). Motivation reconsidered: The concept of competence. Psychological Review, 66(5), 297–333.CrossRefGoogle Scholar
  88. Wilson, T. D., & Gilbert, D. T. (2003). Affective forecasting. In M. Zanna (Ed.), Advances in experimental social psychology (Vol. 35, pp. 345–411). New York: Elsevier.Google Scholar
  89. Wilson, T. D., & Gilbert, D. T. (2008). Explaining away: A model of adaption. Perspectives on Psychological Science, 3(5), 370–386.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2013

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of ZurichZurichSwitzerland
  2. 2.Faculty of Business and EconomicsUniversity of BaselBaselSwitzerland
  3. 3.CREMA—Center for Research in Economics, Management and the ArtsBaselSwitzerland

Personalised recommendations