Experienced Utility

In Thinking Fast and Slow, Daniel Kahneman presents an interesting situation. Imagine you need to receive a series of injections, and the pain for each injection each time is always the same. Suppose in one situation, the series of injections is 20 shots, and in another situation the series is 6 shots. If you were to imagine that you were in each series, would you pay the same amount to have the total number of shots for the series reduced by 2? In one situation you would go from 20 to 18, and in the other from 6 to 4.

 

Kahneman found that people were more likely to pay more to reduce the injection load if the total number of shots for their series was 6 rather than 18. In Kahneman’s eyes, this thinking process is an error. He writes, “at least in some cases, experienced utility is the criterion by which a decision should be assessed. A decision maker who pays different amounts to achieve the same gain of experienced utility (or be spared the same loss) is making a mistake.”

 

Experienced utility is the overall happiness, usefulness, or enjoyment (more or less) that we get out of life, a product, or an experience. In the situation I described above, each injection is equally as painful. The first shot is not any worse than the second, the sixth, or the 15th. So whether you are getting 6 shots or 20 shots, you are still having a similar reduction in the overall amount of pain that you are avoiding when you get two fewer shots. In pure experienced utility, there is no difference between reducing the shot count from 20 to 18 or from 6 to 4. It is two fewer shots, the same reduction in pain, in both instances.

 

But when we imagine ourselves in each situation, it is the low total shot count where we decide we would spend more to reduce the overall level of pain we experience. We are violating the terms of equal experienced utility and instead making a relative comparison. Two is 1/3rd of six, and reducing our pain by 1/3rd is relatively much better than reducing our pain by 1/10th which is what we would do when we moved from 20 to 18.

 

This problem reminds me of sitting first class on an airplane. Sitting on your own couch is much more enjoyable than sitting first class on an airplane. You have a larger TV to enjoy, you don’t have to pay extra for WiFi, and you have an entire kitchen and pantry of snacks available to you. But if someone asked you how much you would pay on any given day for the privilege of enjoying your living room you would look at them and laugh.

 

But we are all willing to pay huge amounts for smaller and less comfy chairs, to have to turn our phones off, and for overpriced alcoholic beverages in first class on an airplane. We are making a similar mistake in terms of experienced utility by making relative comparisons. First class is substantially better than coach, but much worse than our own living room. When we fail to recognize our experienced utility, and instead open ourselves up to paying for relative utility, then we risk making inconsistent decisions and paying far more in some situations than we would dream to pay in others. The relative frame of reference that we adopt could be manipulated by actors for their own ends, to convince us to pay more for things than what we would in another frame of reference.

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