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My presentation basically has one goal: To present the main ideas behind the concept
of experienced utility as it was introduced by Kahneman, Wakker and Sarin in their
work known as Back to Bentham? Explorations of experienced utility

Here, I want to stress out that this paper is considered seminal and really influential
in the world of behavioral economics, especially since it introduced some new ideas
of how we think about utility as a criterion for welfare analysis, but it also resurrected
some old concepts which might have been disregarded too early.

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The main question addressed in this work of Kahneman and colleagues is whether
utility as we think about today is a good criterion for welfare analysis. In the paper,
Kahneman and his colleagues motivated by the frustration with the limits of choice-
based utility as an index of welfare, propose that we should return back to
Bentham.

What its meant by going back to Bentham is the concept of utility as it originally
envisioned by Jeremy Bentham in the seventheenth century. Namely, in the early
days of the utility concept, utility was seen as sum of pleasures from which painful
experiences were deducted. It was basically seen as measure of happiness.

To grasp the idea behind Benthams hedonic view of utility, Kahneman and his
colleagues coin the term experienced utility.

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As I already said this paper had a lot of influence in behavioral economics and a lot of
research and papers followed it.

If one can sort out the work and research done after the paper of Kahneman and his
colleagues, it would be probably in work related to better measures of experienced
utility as a well as papers related to some of the problems that experienced utility
faces in order to become a standard for welfare analysis.

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Before we delve into experienced utility, lets remind ourselves about how we think
of utility today.

This concept basically relies today on inference of preferences based on the observed
choices that people make. Kahneman and colleagues call these revealed preferences
decision utility as opposed to experienced utility which is a measure of subjective
well-being (or happiness).

So, todays standard approach of measuring welfare is based on the concept of

decision utility or choice-based utility.

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In this sense utility, as we see it today, decision utility has little to do with happiness.
Todays concept of utility is almost entirely devoided of the notion of happiness or
related notions such as pleasures and pains and subjective well-being.

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The focus of the analysis of Kahneman and his colleagues is around the concept of
temporally extended outcomes by which they stress out the realization that when
people value their experience, the valued outcomes extend over time.

However, whats really important, the authors distinguish two notions of experienced
utility in their analysis: instant utility and remembered utility.

Instant utility is the foundation, the building block of the experienced utility and it
refers to the pleasures and pains felt at the moment.

On the other side, remembered utility is referred to peoples evaluation of temporally

extended outcomes that have already happened in the past.

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According to the authors both instant and remembered utility play an adaptive role in
humans lives.

The adaptive role of instant utility and hence pleasure and pain are best observed
through some of the conditions which trigger these biological responses. If you eat
some sweet food, this activity gives you pleasure. Your body tells you that to continue
doing this at least to a certain point. But if you put your hand in a fire, your bodys
immediate reaction is pain and consequent interruption of the activity in order harm
to be avoided. Both pain and pleasure are regulatory responses to our surrounding
which help us survive.

On the other hand, Kahneman and his colleagues (1997) point out that the adaptive
function of remembered utility is effectuated when a person is faced with a situation
which has already been experienced in the past. In such case, through the persons
memories, remembered utility help him to decide whether such situation should be
approached or avoided when it happens again.

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Contrary to the common view that hedonic states cannot be measured as they are
subjective, Kahneman and his colleagues make a bold claim in their work arguing that
both aspects of experienced utility, instant and remembered utility, can be measured.

They use studies from psychology to support this claim which show that physiological
functions that govern pleasing and painful responses are similar in people

Subjective measures of instant utility, such as verbal and numerical reports can be
combined with objective ones, such as facial expressions. Even though the
correlations between different measures may not perfect they claim that the shared
variance is enough for the idea of measuring instant utility to work

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As for remembered utility, it is claimed in the paper that it can be measured even
easier by reported evaluations of events in the past and other methods.

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Kahneman and his colleagues claim that experienced utility and decision utility do not
coincide and they show this by presenting the following features of remembered
utility, discovered through experiments: it exhibits duration neglect and it follows
Peak-End rule.

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The implications and meaning of these attributes of remembered utility are best
understood if we consider some of the experiments done in the paper. One
experiment included patients in a hospital that underwent a colonoscopy procedure.
During the procedure, the patients reported their instant utility i.e. the level of pain,
every 60 seconds. After the procedure, the patients evaluated the experience and
reported the remembered utility. It had been observed that when the patients
evaluated the experience they basically created a collage of representative moments
of the experience which included the peak and end moments i.e. the moments when
the intensity of the pain was highest and the moment before the procedure was
terminated.

Based on this collage of representative moments, the patients evaluated the whole
experience assigning single hedonic value.

A surprising result was that the duration of the procedure had no influence on the
evaluation of the experience. You can check this result by yourself thinking of your
best holiday. Did it matter how long it lasted?

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Whats maybe the most important insight from this paper related to welfare analysis
is that the observed Peak-End violates temporal monotonicity: Adding an extra period
of discomfort to a bad experience will improve the remembered utility of the
experience if the added period ends on a less unpleasant note.

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The way Kahneman and his colleagues showed this was that they took one patient
who underwent 10 minutes of colonoscopy procedure and another who underwent
colonoscopy procedure for 60 seconds more. However, for the patient B for the last
60 seconds the colonoscopy was inside the body remaining stationary, meaning less
pain was invoked. The patients reported their level of pain on a beeper every 60
seconds.

After the procedure was done, when the patients were asked to recall the
experienced pain, patient B reported less pain overall, only because the whole
experience ended on a less pleasant note.

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Violation of temporal monotonicity implies that our memories of past experiences
are inaccurate and biased. Since remembered utility is evaluation of past experiences
and it reflects our memory of the hedonic experience it is also biased.

Finally, they also show that the biases of remembered utility transfers to decision.
When people make choices, they are actually comparing remembered utilities,
without going through explicit comparisons of the experienced instant utility. In
further studies, Kahneman and his colleagues show that basing choices on biased
remembered utilities can lead to making dominated choices.

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This brings us to the most important implication: that peoples decisions do not
necessarily maximize experienced utility.

How is this important for measuring welfare? It tells us that due to the biases of the
memory-based approach for measuring utility experienced utility directly measured
through instant utility might be a preferable criterion for welfare analysis.

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However, since an experience usually last more than an instant i. e. it extends
temporally over time we should consider measuring total utility.

They further suggest temporal integration as a candidate for a normative principle of

total utility an idea which goes back to Edgeworth.

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The requirements under which total utility is the temporal integral of some
transformation of instant utility are the following:
Ordinal measurement across situations The measurement of instant utility and
total utility must be ordinal. This implies that between two instants of experience it
can be distinguished which one carries a higher hedonic value;
Distinctive neutral point We must define a hedonic neutral point such as neither
pleasant nor unpleasant in the analysis. This plays a special role in the analysis since
it anchors the scale and permits comparisons across situations and persons;
Inclusiveness The measure of instant utility should incorporate all the information
that are relevant for evaluation of total utilities
Separability The order at which instant utilities are experienced has no influence
on the total utility;
Time neutrality All instants of experience are weighted the same in total utility.
The time neutrality assumption goes against the concept of discounting of utility
which is the dominant position in the economic literature

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Experienced utility as a welfare criterion is not without problems of its own.

How do we measure experienced utility? Are life satisfaction and happiness surveys
reliable enough?

Its been shown that answers to these type of survey questions represent
retrospective judgments which are created by the respondent only when being asked
and are influenced by the memory and mood of the respondent. Moreover, the
immediate context plays an important rule. In response to the these limitations of life
satisfaction and happiness surveys a lot of effort has been put in developing better
measures of experienced utility based on a moment to moment approach

Another serious issue is related to the phenomenon of hedonic adaptation. It has

been widely observed that significant life events have surprisingly little effect on
measured happiness. People seem to hedonically adapt to changes in life
circumstances no matter how bad they seem at first

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