29  Preference over profiles

Recall the assumption of utility independence:

All that matters is maximizing the sum of discounted utilities. Decision makers are assumed to have no preference for the distribution of utilities.

However, there is evidence that people care about the shape of the utility stream over time. People don’t care solely about maximizing discounted utility. This includes evidence for delayed gratification, spread and variation.

This is known as having a “preference over profiles”.

If we have preferences over profiles, the assumption of utility independence no longer holds.

29.1 Delayed gratification

Consider the following example:

It is a sunny weekend. You can either study today and go to the beach tomorrow, or you can go to the beach today and study tomorrow.

Studying gives you a utility of 10. Going to the beach gives you a utility of 20.

What would an exponential discounter with \delta=0.8 do?

What would a present-biased agent with \beta=0.5 and \delta=0.8 do?

It is easy to determine that both agents would go to the beach today and study tomorrow. They will always schedule pleasant tasks before unpleasant tasks.

Does this match people’s observed behaviour?

There is considerable evidence that people will schedule unpleasant experiences first and pleasant ones later. This might be thought of as a preference for an increasing utility profile.

How could this be possible for someone who discounts the future?

One way is to ease the requirement that \delta be less than one. This provides a solution to the weekend problem, but also leads to the potential of endlessly postponing pleasant experiences.

Easing this requirement also clashes with other evidence that people often postpone unpleasant tasks and that people have a \delta much less than one for many decisions.

29.2 Spread of utility

There is some evidence that we have a preference for spread of utility.

For example, if we have a box of chocolate, we often distribute eating them over time (although at others we eat than all in one sitting).

29.3 Variation

We also have preference for variation.

You favourite meal is lasagna. Your second favourite meal is spaghetti bolognaise. Your third favourite is fish and chips. You are offered the following two options:

  1. Lasagna every night for the next week.
  2. Alternating meals of lasagna, spaghetti and fish and chips.

We don’t choose to have the same good or service over and over.