Some Examples of Adaptive Utility

Abstract

We have seen that, in general, the concept of adaptive utility is useful when uncertainty exists and the individual is operating in a multiperiod framework. It is the investment in information that characterizes the adaptive utility function in the setting of sequential decision problems. The individual is trying to determine his or her preferences by gaining more information through consuming different commodities or different brands of the same commodity. In this fashion, the consumer will usually be able to determine his or her utility function with a high degree of precision Typically as more money or time or effort is invested, the uncertainty about the utility function will be decreased. Also, the greater the investment in the early periods, the sooner the form of the utility function can be determined. This exploratory activity is a form of investment that has a payoff in information (see also Kihlstrom 1974).