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Koszegi, “Utility from anticipation and personal equilibrium”

Koszegi, “Utility from anticipation and personal equilibrium”. Framework: Two selves, 1 and 2 Choices z 1 ,z 2 , belief about z 2 is f 1 u 1 (z 1 ,f 1 ,z 2 ) anticipation function Φ (z 1 ,d 2 )=f 1 (d 2 is period 2 decision problem) personal equilibrium: each self optimizes

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Koszegi, “Utility from anticipation and personal equilibrium”

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  1. Koszegi, “Utility from anticipation and personal equilibrium” • Framework: Two selves, 1 and 2 • Choices z1,z2 , belief about z2 is f1 • u1(z1,f1,z2) • anticipation function Φ(z1,d2)=f1 (d2 is period 2 decision problem) • personal equilibrium: • each self optimizes • Φ(z1,d2)=s2(z1,Φ(z1,d2),d2) anticipate s2(.) choice • Beliefs are both a source of utility and constraint • Timeline: • Choose from z1 X d2. • Choose f1 from Φ. • Choose z2

  2. Three interesting patterns • Self-fulfilling beliefs • u2(δz,z)>u2(δz,z’) u2(δz’,z’)> u2(δz’,z) • prefer z if you expect(ed) z, z’ if you expect(ed) z’ • Cognitive dissonance, encoding bias • “If I could change the way/I live my life today/I wouldn’t change/a single thing”– Lisa Stansfield • Undermines learning from mistakes • Time inconsistency • Self 2 prefers z’ given beliefs u2(f1,z’)>u2(f1,z) • but self 1 preferred to believe and pick z u1(x,δz,z)>u1(x,δz’,z’) • Problem: Beliefs occur after self 1 picks • Informational preferences • Resolution-loving: Likes to know actual period 2 choice ahead of time • Information-neutral: Doesn’t care about knowing choice ahead of time (“go with the flow”) • Information-loving: Prefers more information to less (convex utility in f1) • Disappointment-averse (prefers correct to incorrect guesses): • u1(x,δz,z)+u1(x,δz’,z’)> u1(x,δz’,z)+u1(x,δ • Surprising fact: If none of above hold, then personal equilibrium iff u* max’s E(u1(z1,z2) I.e. only way beliefs can matter is through these three

  3. Types of anticipation preferences • Reference-dependent preferences (K-Rabin 04) • Belief about choice changes reference point • Endowment effects/”auction fever” • Explains experience effects (experienced traders expect to lose objects, doesn’t enter endowment/ f1) • Emotions and self-regulation • E.g. depression. Focusses attention on bad outcomes, causes further depression • Intimidating decisions • f1 may increase stress about future choices • health care, marriage, job market, etc. • Better to pretend future choice=status quo • Q: When are these effects economically large?’ • Avoid the doctor late cancer diagnosis • Supply side determination of endowment effects (marketing)

  4. Two time systems (McClure et al Sci 04):u(x0,x1,…)/ β = (1/β)u(x0) + [δu(x1) + δ2u(x2) +…]Impulsive β↓ long-term planning δ↓

  5. Problem: Measured δ system is all stimulus activity…use difficulty to separate δ (bottom left), δ more active in late decisions with immediacy…but is it δ or complexity?

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