Our Capacity to Value
Decision science may have useful tools to help map unhappy situations
Posted Aug 16, 2012
One of the fundamental concepts for in behavioral economics is utility. Championed by Jeremy Bentham, the first proponent of the political philosophy of utilitarianism (“the greatest good for the greatest number”), utility can be considered the specialized jargon word for value, for how useful or desirable something is. The French mathematician and philosopher Blaise Pascal proposed a mathematical approach for utility (expected value E(x) below) by combining two numerical quantities: how good would it be to get something (often depicted as a monetary value, say 'x') and how likely are you to get it (a percentage or probability, P(x), for example). The utility of any given monetary proposition can be calculated with this equation. *
Formula for Utility: E(x) = x · P (x)
For example, a typical experiment in behavioural economics will feature a 50% chance at $10, and a 10% chance at $30. The logic here is that if you were able to make this choice repeatedly, you would expect that the first choice would yield, on average, $5 per occasion, and the second, about 3$ per occasion. This average is called the expected value, or expectancy. Thus the utility of the first offer (expected value: $5 per occasion) is greater than the utility of the second offer (expected value: $3 per occasion).
The kernel of behavioral economics I see at work on the hoarding reality shows is the skewed valuation of the utility of all that stuff. This skewed perspective reminds me of Prospect Theory and its refinement, Cumulative Prospect Theory—Nobel-prize winning psychology work by Daniel Kahneman and his research partner, Amos Tversky. This approach to how people make choices challenged the standard assumption in economic theory that individuals make the most logical choices in their economic decisions. Instead, Prospect Theory showed through a series of experimental results that individuals’ affinity for gain tends to be less than their aversion to an equivalent loss. People tend to be much more motivated not to lose $15 that they have then to obtain $15 that they don’t yet have. The graph below is the famous illustration on how people tend to assign more negative value (aversion) to a loss of say, $15, than positive value (affinity) to a gain of $15. The comparison I draw here is to the utility (value) that is perceived by persons who tend to hoard appears to be over-weighted in favour of avoiding the loss of these objects, and diminished in terms of remembering or resonating to the value of personal relationships, freedom, and health. In the graphical language of Kahneman and Tversky, the aversion to loss curve is very steep and the affinity to gain curve is very shallow. I leave this observation open for future research by aspiring clinical scientists with a heart for those who are suffering in these situations.
* Acknowledgment for this short introduction to Pascal’s take on utility to Daniel Gilbert, who presented the talk “Stumbling on Happiness”, as the Bring the Family address at the 19th annual convention of the Association for Psychological Science (2007).