Peaks and Preferences

April 1st, 2008

Views: 748

Posted by ChrisG at 12:30 pm

Over at Stumbling and Mumbling, this is an interesting example of how economists typically misunderstand preferences. Their misunderstanding derives from the fundamentally mistaken idea that we should view belief and action as grounded on subjective states and expected utility. Demand, the post concludes, often includes an irrational component, based on our capacity to misremember unpleasant episodes of an experience, so long as the end of the experience was not as bad as its worst passages (the ‘peak-end’ theory).

The key question this raises is naturally whether the meaning for an individual of such an episode (e.g. a holiday) and its import for future action can be successfully reduced to something like a series of subjective states the holiday brought about and how the individual rates them on a scale of positive and negative magnitudes of ‘utility’. The answer to this question is that this is not possible. Consider the following example from John O’Neill:

A. A newly married couple, couple A, go on a two week honeymoon. The holiday begins disastrously: they each discover much in the other which they had not noticed before, and they dislike what they find. The first two days are spent in an almighty row. However, while they argue continuously over the next seven days, they begin to resolve their differences and come to a deeper appreciation of each other. Over the last five days of the holiday they are much happier and both feel that they have realised a relationship that is better than that which they had before their argument. The holiday ends happily. Sadly, on their return journey, the plane that carries them explodes and they die.

Obviously, this holiday could have gone better, or at least ended better. But now compare with this alternative scenario:

B. A newly married couple, couple B, go on honeymoon. The first twelve days proceed wonderfully. On the thirteenth day their relationship deteriorates badly as each begins to notice and dislike in the other a character trait which they had not noticed before, at the same time realising that the other had a quite mistaken view of themselves. On the last day of the holiday they have a terrible row, and sit on opposite ends of the plane on the return journey. They both die in an explosion on the plane.

Not a good denouement either, but let’s ignore the final bit of each story for a moment. Now, based on a quantitative estimate of subjective utility (and ignoring for a moment the peak-end theory Chris employs), the second scenario obviously goes much better, just because there are thirteen days of general wonderfulness, as opposed to the five days of happiness (relative, subjectively speaking, to the nine days of arguing) for the first couple. So the overall sum of positive utility is obviously greater for couple B. Yet the first scenario is obviously more satisfying – even given how it ultimately ends. Now, is this because of the peak-end theory? Obviously the penultimate stage of A is better than the worst part of the holiday, just as the penultimate stage of B is a lot worse than its best bits. But what makes the experience of the holiday in A better is the experience of development, closeness and mutual understanding that it contains, one which derives from a fundamental conflict and its ultimate successful working-through. This has nothing to do with the hedonic values of each part of the holiday, but rather the meaning of the whole as a narrative, which derives in part from its relationship to the couple’s past and how it promises new perspectives on their future together. Importantly, this narrative is not just subjective, but intersubjective – a product of a mutual process of compromise, careful judgement, and renewed emotional intimacy and commitment. Compared to this, the unpleasantness of having to fly from Stansted or whatever is entirely insignificant – not in the sense that it is outweighed by the expected utility benefits, but perhaps because to give up the holiday because of these sorts of considerations would be to lose an important dimension (the commemoration, the ritual) of what makes the relationship meaningful.

Therefore, there is nothing at all irrational about this couple wanting to take a holiday together each year. Whether as an annual celebration of this first holiday or as a kind of ritual whereby they take themselves out of the everyday in order to rediscover each other anew within a different environment, the value of holidaying has nothing do with the expected subjective payoffs, and everything to do with the objective (=intersubjective) meaning of the experience of holidaying within their relationship.

As well as its misuses of mathematics, economics still has to recover from its long history of overindulging in the hedonic calculus.