The aim of this chapter is to introduce some psychological considerations that are relevant to the conception of utility and to the task of comparing utilities. The standard approach to utility in decision science is an objectivist view, which focuses on tangible goods as the carriers of utility, and on observable preferences as the proper measure of it. In contrast, a psychological view tends to focus on interpreted objects and events as the carriers of utility, and on experiences of pleasure or satisfaction as the proper measure of it. Drawing on the psychology of perception, we discuss the problem of predicting future tastes and provide illustrative examples of two central facts of experience that are likely to be ignored in an objectivist analysis of utility: adaptation and loss aversion. We show that lay intuitions about loss aversion are at the root of everyday judgments of fairness in interpersonal dealings, and we consider some implications of these notions for problems of allocation and reallocation.

Two concepts of utility

In the essay that initiated the modern analysis of decision making, Daniel Bernoulli (1738) proposed that people evaluate financial options by weighting the utilities of possible outcomes by their probabilities. His argument and his references to earlier writings by Gabriel Cramer identify utility as satisfaction – a subjective state or experience. Jeremy Bentham and John Stuart Mill also used the term utility to refer to the hedonic quality of experience.