The law of diminishing marginal utility is at the heart of the explanation of numerous economic phenomena, including time preference and the value of goods.
Diminishing marginal utility is a fundamentally rational process: I really do need my first $20,000 more than I need the next $100,000, because when spending the first $20,000 to increase my utility, I can knock off my low-hanging fruit preferences like food, water, and housing—but when spending the next $100,000 I come to more complicated preferences like social status and comfort that aren’t quite as important.
But the discounting I’m mentioning here is per item. I would be more likely to excuse a $50 cost overrun on a $200 item than on a $20 item, even if I am a millionaire and in the end $50 makes no difference to my total amount of money either way. Even if I know I’m going to buy both a $20 item and a $200 item, I’d still prefer getting the $50 surcharge attached to the $200 item, even though it doesn’t affect my total expenditure. That’s irrational, and so it’s got to be a bias rather than an instance of diminishing marginal utility.
Good call—I think. Diminishing marginal utility does seem like a rather nice name for phenomena such as temporal discounting, expenditure discounting and effort discounting, though—even if it is currently defined to mean something else. Is there a better name for these things? Or is some terminology hijacking required?
It seems as though this idea is closely related to “diminishing marginal utility”:
I don’t think so.
Diminishing marginal utility is a fundamentally rational process: I really do need my first $20,000 more than I need the next $100,000, because when spending the first $20,000 to increase my utility, I can knock off my low-hanging fruit preferences like food, water, and housing—but when spending the next $100,000 I come to more complicated preferences like social status and comfort that aren’t quite as important.
But the discounting I’m mentioning here is per item. I would be more likely to excuse a $50 cost overrun on a $200 item than on a $20 item, even if I am a millionaire and in the end $50 makes no difference to my total amount of money either way. Even if I know I’m going to buy both a $20 item and a $200 item, I’d still prefer getting the $50 surcharge attached to the $200 item, even though it doesn’t affect my total expenditure. That’s irrational, and so it’s got to be a bias rather than an instance of diminishing marginal utility.
Good call—I think. Diminishing marginal utility does seem like a rather nice name for phenomena such as temporal discounting, expenditure discounting and effort discounting, though—even if it is currently defined to mean something else. Is there a better name for these things? Or is some terminology hijacking required?
You are correct, timtyler is wrong.