Models of Experienced Utility

The notion of experienced utility lies at the intersection of economics and psychology. We will present two models of experienced utility. The first explores the generalized principle of diminishing marginal utility (recent consumption reduces current marginal utility). We derive a mathematical representation of satiation preferences, calculate optimal consumption sequences, and obtain real-word data from musical sequences to test the predictions of the model.

The second model of experienced utility specifies the endogenous formation of reference prices, and predicts how loss aversion is to be experienced in a dynamic trading environment under uncertainty. Reference prices follow a memory-based psychological process. The result is the MARA model, which stands for mental accounting and reference price adaptation. The model predicts three relevant anomalies, namely, reluctance to trade, a variety of sunk-cost effects, and the tendency towards pre-payment (e.g., the flat rate bias). The model also produces novel predictions, which we put to test.