Utility from anticipation and personal equilibrium

Botond Koszegi*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract (may include machine translation)

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.

Original languageEnglish
Pages (from-to)415-444
Number of pages30
JournalEconomic Theory
Volume44
Issue number3
DOIs
StatePublished - 2010
Externally publishedYes

Keywords

  • Anticipation
  • Disappointment aversion
  • Personal equilibrium
  • Time inconsistency

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