Koszegi, “Utility from anticipation and personal equilibrium” Framework: Two selves, 1 and 2 –Choices z 1,z 2, belief about z 2 is f 1 –u 1 (z 1,f 1,z 2 ) –anticipation function Φ(z 1,d 2 )=f 1 (d 2 is period 2 decision problem) –personal equilibrium: each self optimizes Φ(z 1,d 2 )=s 2 (z 1,Φ(z 1,d 2 ),d 2 ) anticipate s 2 (.) choice –Beliefs are both a source of utility and constraint Timeline: –Choose from z 1 X d 2. –Choose f 1 from Φ. –Choose z 2

Three interesting patterns Self-fulfilling beliefs –u 2 (δ z,z)>u 2 (δ z,z’) u 2 (δ z’,z’)> u 2 (δ z’,z) –prefer z if you expect(ed) z, z’ if you expect(ed) z’ –Cognitive dissonance, encoding bias “If I could change the way/I live my life today/I wouldn’t change/a single thing”– Lisa Stansfield Undermines learning from mistakes Time inconsistency –Self 2 prefers z’ given beliefs u 2 (f 1,z’)>u 2 (f 1,z) –but self 1 preferred to believe and pick z u 1 (x,δ z,z)>u 1 (x,δ z’,z’) –Problem: Beliefs occur after self 1 picks Informational preferences –Resolution-loving: Likes to know actual period 2 choice ahead of time –Information-neutral: Doesn’t care about knowing choice ahead of time (“go with the flow”) –Information-loving: Prefers more information to less (convex utility in f 1 ) –Disappointment-averse (prefers correct to incorrect guesses): u 1 (x,δ z,z)+u 1 (x,δ z’,z’)> u 1 (x,δ z’,z)+u 1 (x,δ Surprising fact: If none of above hold, then personal equilibrium iff u* max’s E(u 1 (z 1,z 2 ) I.e. only way beliefs can matter is through these three

Types of anticipation preferences Reference-dependent preferences (K-Rabin 04) –Belief about choice changes reference point –Endowment effects/”auction fever” –Explains experience effects (experienced traders expect to lose objects, doesn’t enter endowment/ f 1 ) Emotions and self-regulation –E.g. depression. Focusses attention on bad outcomes, causes further depression Intimidating decisions –f 1 may increase stress about future choices –health care, marriage, job market, etc. –Better to pretend future choice=status quo Q: When are these effects economically large?’ –Avoid the doctor  late cancer diagnosis –Supply side determination of endowment effects (marketing)

Two time systems (McClure et al Sci 04): u(x 0,x 1,…)/ β = (1/β)u(x 0 ) + [δu(x 1 ) + δ 2 u(x 2 ) +…] Impulsive β ↓ long-term planning δ ↓

Problem: Measured δ system is all stimulus activity… use difficulty to separate δ (bottom left), δ more active in late decisions with immediacy…but is it δ or complexity?