Economic Theory - Greg Kubitz (QUT)

Title: "If you can, you must.'' Information, utility, and loss aversion

Abstract: We consider utility as a hedonic reward system shaped by evolution to motivate us to make the best decisions possible. This system gives higher subjective rewards to higher levels of success. We investigate how an optimal reward system would adapt when individuals receive new information about their potential, i.e. the level of success they may be able to reach. We are able to explain key features about subjective utility. First, the utility function over outcomes is S-shaped around an individual's expectations about his potential which acts as a reference point. Second, this utility function is steeper below the reference point, leading to the emergence of loss aversion. Third, individuals experience anticipatory utility associated with forming higher expectations about their potential.