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Utility from anticipation and personal equilibrium

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Abstract

I develop a dynamic model of individual decisionmaking in which the agent derives utility from physical outcomes as well as from rational beliefs about physical outcomes (“anticipation”), and these two payoff components can interact. Beliefs and behavior are jointly determined in a personal equilibrium by the requirement that behavior given past beliefs must be consistent with those beliefs. I explore three phenomena made possible by utility from anticipation, and prove that if the decisionmaker’s behavior is distinguishable from a person’s who cares only about physical outcomes, she must exhibit at least one of these phenomena. First, the decisionmaker can be prone to self-fulfilling expectations. Second, she might be time-inconsistent even if her preferences in all periods are identical. Third, she might exhibit informational preferences, where these preferences are intimately connected to her attitudes toward disappointments. Applications of the framework to reference-dependent preferences, impulsive behaviors, and emotionally difficult choices are discussed.

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Authors and Affiliations

  1. Department of Economics, University of California, 508-1 Evans Hall #3880, Berkeley, CA, 94720, USA

    Botond Kőszegi

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  1. Botond Kőszegi
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Correspondence to Botond Kőszegi.

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I thank an anonymous referee, George Akerlof, Andrew Caplin, Steven Goldman, Paul Heidhues, Wei Li, Mark Machina, Máté Matolcsi, Markus Möbius, Wolfgang Pesendorfer, Ben Polak, Attila Pór, Matthew Rabin, Luca Rigotti, Tanya Rosenblat, Jacob Sagi, and Chris Shannon for comments.

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Kőszegi, B. Utility from anticipation and personal equilibrium. Econ Theory 44, 415–444 (2010). https://doi.org/10.1007/s00199-009-0465-x

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