European Business Schools Librarian's Group

IESE Research Papers,
IESE Business School

No D/684: Predicting utility under satiation and habituation

Manel Baucells () and Rakesh K. Sarin
Additional contact information
Manel Baucells: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Rakesh K. Sarin: UCLA Anderson School of Management

Abstract: We introduce a modification of the discounted utility model that accounts for both habituation and satiation in intertemporal choice. Habituation level and satiation level are state variables that induce changes in preferences as those states vary. We examine several properties of our model, discuss willingness to pay for an additional unit of consumption, and characterize the optimal consumption path. Predicted utility under projection bias and narrow bracketing is compared to actual realized utility. We argue that projection bias and narrow bracketing successfully explain the hedonic treadmill in the research area of happiness and life satisfaction.

Keywords: Time preference; discounted utility; habituation; satiation; local substitution; well-being; life satisfaction

25 pages, March 5, 2007

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