I generally prefer to receive $500 over receiving just ten cents, unless the $500 is coming from the welfare office while the ten cents is the very last dime my arch nemesis possesses – payable to me. The larger sum, though more useful to me, is a bitter pill to swallow, whereas the precious dime clawed from the pocket of my enemy is sweet victory.

“and that improving their well-being can ONLY be achieved at the expense of impairing my own”

Yes.

Suppose I am more concerned for the well-being of another person than for my own well-being; and that improving their well-being can also be achieved at the expense of impairing my own; and that I do actually act in accordance with these comparative valuations, and make the required personal sacrifice to benefit this other person.

Here, benefitting the other person has greater utility to me than benefitting myself. My actions bear this out.

However, benefitting myself also entails lesser anticipated well-being for myself. I know what I am getting into.

Thus, utility and anticipated well-being move in opposite ordinal directions. Hence, they cannot be the same thing.

QED

P.S. It’s your lucky day! This is a two-for-one offer! Here’s comes a supplementary example.

Question: Would you prefer to live in an illusory world that satisfied your every need (a.k.a. The Matrix) or in the real world that didn’t? (This is a version of Robert Nozick’s “experience machine”.)

Not everyone would choose the first option. People value contact with reality (ascribe it greater utility) more than they value anticipated well-being.

QED

Granted I’m only in Intermediate Macro at the moment, but we just covered the first and second welfare theorem a little more deeply. I’m starting to see why, in a perfect world with perfectly competitive markets, all you would need is a price to get everything right. The marginal rate of transformation needs to be equal to the marginal rate of substitution of leisure for consumption. Both of these are equal to the price.

In any case, kudos and thanks for responding.

People tend to make expectations about future events. People tend to plan for these expectations of future events. If people are perfectly rational, then these expectations will come to fruition.

This is, I think, a very poor description.

Better to say something like this: When people expect the probability of a future event to be p, then they behave in a way that causes the probability of that event to be f(p), where f is a function that can be derived from the model at hand. The rational expectations hypothesis is that the actual expectation p is a fixed point of the function f.

Example: The more likely I think a traffic jam will be, the less likely I am to drive, and therefore the less likely there is to be a traffic jam. A more detailed version of that model might predict, for example, that when I and my neighbors expect the probability of a traffic jam to be p, we behave in a way that makes the actual probability equal to 1-p^2. In that model, the rational expectations equilibrium occurs when the expected probabity is about .618. (Because 1-.618^2 = .618)

Please tell me if this is a better description of Rational Expectations: People tend to make expectations about future events. People tend to plan for these expectations of future events. If people are perfectly rational, then these expectations will come to fruition. Furthermore, given enough time to learn, people will start to trend towards a rational expectation.

I go to UMN, Twin Cities and my Grad student/teacher (who I think is studying R.E. right now, because she fawns over it when briefly describing it) says that many economists think that certain recessions were caused simply because enough people expected them to occur.

The main distinguishing feature of a utility function is that, given two options x and y, u(x)>u(y) if and only if x is preferred to y. What is meant by preferred? It means that, given a budget constraint, you’ll choose the option x’ such that x’ is the most preferred affordable option. So, the question really isn’t about utility, but about preferences. It’s easy to fall into the trap of thinking “she chooses x because it has higher utility”, when really the causal arrow is going the other way; it has higher utility because she chooses x.

So the idea here is that, nothing about this is supposed to say WHY someone prefers one outcome to another. You have a preference ordering over every possible outcome (this is one of the assumptions of utility theory—that you have a preference ordering over every single pair of outcomes) and your reasons for preferring x to y are totally your business. Suppose your preferences were such that, given a choice between two options, you always chose the one that brought you the least well-being. We could take that preference ordering and construct a utility function which represented your preferences, and you would behave as though you are maximizing that utility function, which would also be minimizing your well-being. That’s why economists try to draw a sharp distinction between utility and well-being. Well-being is something more abstract and philosophical whole utility is very mechanical. Saying that people prefer outcomes which bring them higher well-being, while plausible, is only one possible way to order preferences.

A parent making a sacrifice is similar. I can anticipate that doing without something will reduce my expected well-being. In the absence of children, I will not choose to do without. With children, I may chose to do without, even though I have already accepted that to do so will reduce my well-being. This is balanced by an increase in utility.

Well-being is an ill defined term. I could say that my well being ir reduced by the sacrifice without children, but with children my well-being is not reduced because of the increase in my satisfaction. But having thought about it, I now believe that a distinction between utility and well-being in reasonable.

Of course there are subjective feelings of well-being, and of course people like to enhance theirs, so of course it affects their utility functions. But you don’t need this to talk about utility. It might though limit the applicability of the utility idea.

Yes, characterizing utility as related to wellbeing might limit the applicability of the utility idea. But can anyone think of any actual circumstance in which it does?

I want to communicate. I perceive a trade-off between rigor and appealing to common experience.

I sense experts in technical fields often don’t perceive this trade-off. When confronted with people who don’t understand what was said, an expert may be prone to respond by providing explanations with ever greater rigor and detail. Often these explanations fail to enhance communication.

Here we have a concept of “utility” which von Neumann and Morgenstern used in a particular conceptual model. So when people ask me, What do you mean by “utility?” how should I respond?

A. I could direct them to consult the papers published by von Neumann and Morgenstern. No one could fault me for offering an answer that lacked rigor. But people might well fault me failing to communication; I expect that few people will actually follow my suggestion. (*I’ve* never read any von Neumann or Morgenstern.)

B. I could say, “Each person acts as if she has assigned a value to each alternative that corresponds with that alternative’s likelihood of promoting wellbeing.” I sense this answer is more likely to communicate something to people. And yes, the idea it communicates may differ from the idea von Neumann would have communicated if he were present. But, on balance, I prefer the successful communication of an imperfectly-expressed idea to the unsuccessful communication of a perfectly-expressed idea.

Of course, my assessment of this balance depends upon how much distortion my expression of an idea interjects into the discussion. So I again return to the question, what distortion arises from describing utility in terms of subjective wellbeing? Can anyone think of an example that would distinguish between “utility” and a subjective measure of anticipated wellbeing?