I’m just skimming the beginning of the paper, but it says
Suppose that, from any initial wealth level, a person turns down gambles where she loses $100 or gains $110, each with 50% probability. Then she will turn down 50-50 bets of losing
$1000 or gaining any sum of money.
This is shown by observing that this bet refusal means the person values the 11th dollar above her current wealth by at most 10⁄11 as much as the 10th-to-last dollar of her current wealth. You then consider that she would also turn down the same bet if she were $21 wealthier, and see that she values the 32nd dollar above her current wealth at most 10⁄11 x 10⁄11 as much as the 10th-to-last dollar of her current wealth. Etcetera. It then says,
Indeed, the theorem is really just an algebraic articulation of how implausible it is that the consumption value of a dollar changes significantly as a function of whether your lifetime wealth is $10, $100, or even $1,000 higher or lower.
There are 2 problems with this argument already. The first is that it’s not clear that people have a positive-expected-value bet that they would refuse regardless of how much money they already have. But the larger problem is that it assumes “utility” is some simple function of net worth. We already know this isn’t so, from the much simpler observation that people feel much worse about losing $10 than about not winning $10, even if their net worth is so much larger than $10 that the concavity of a utility function can’t explain it.
A person’s utility is not based on an accountant-like evaluation of their net worth. Utility measures feelings, not dollars. Feelings are context-dependent, and the amount someone already has in the bank is not as salient as it ought to be if net worth were the only consideration. We have all heard stories of misers who had a childhood of poverty and were irrationally cheap even after getting rich; and no one thinks this shatters utility theory.
So this paper is not a knockdown argument against utility functions. It’s an argument against the notion that human utility is based solely on dollars.
I’m just skimming the beginning of the paper, but it says
This is shown by observing that this bet refusal means the person values the 11th dollar above her current wealth by at most 10⁄11 as much as the 10th-to-last dollar of her current wealth. You then consider that she would also turn down the same bet if she were $21 wealthier, and see that she values the 32nd dollar above her current wealth at most 10⁄11 x 10⁄11 as much as the 10th-to-last dollar of her current wealth. Etcetera. It then says,
There are 2 problems with this argument already. The first is that it’s not clear that people have a positive-expected-value bet that they would refuse regardless of how much money they already have. But the larger problem is that it assumes “utility” is some simple function of net worth. We already know this isn’t so, from the much simpler observation that people feel much worse about losing $10 than about not winning $10, even if their net worth is so much larger than $10 that the concavity of a utility function can’t explain it.
A person’s utility is not based on an accountant-like evaluation of their net worth. Utility measures feelings, not dollars. Feelings are context-dependent, and the amount someone already has in the bank is not as salient as it ought to be if net worth were the only consideration. We have all heard stories of misers who had a childhood of poverty and were irrationally cheap even after getting rich; and no one thinks this shatters utility theory.
So this paper is not a knockdown argument against utility functions. It’s an argument against the notion that human utility is based solely on dollars.