Satiation Preferences - The Case of Certainty

Speaker(s): 
Daniel Smith (Universität Mannheim)
Date: 
Thursday, April 24, 2014 - 4:15pm
Location: 
TU Berlin, Straße des 17. Juni 136, 10623 Berlin, Raum MA 041

Based on a neurobiological model, we explore the origins of utility. We find that the standard continuous-time version of discounted utility suffers from a major inadequacy: it does not possess the local substitution property (consumption in nearby dates should be close substitutes), and hence does not produce a continuous functional in the space of consumption paths. This problem reverberates in the discrete-time version of discounted utility if consumption takes place in nearby dates. The literature has proposed one alternative, the durability model, that lacks economic appeal. We propose a second alternative, the satiation model. The satiation model builds on the notion that marginal instant utility depends on an index of recent consumption, called the satiation level. We characterize the satiation model in terms of five intuitive properties, and explore its implications. Optimal consumption plans for the standard intertemporal allocation problem involves a mixture of discrete and continuous consumption (e.g., an initial gulp, followed by a steady flow of consumption, and a final gulp). Finally, using a novel dataset collected from online social media, we find evidence that real-life consumption patterns exhibit precisely this pattern predicted by our model.