Economic Consequences of Mispredicting Utility

A framework is proposed for organizing phenomena related to the (mis)predictionof utility, in particular neglecting adaptation. A categorization is introduced that accounts forasymmetries in misprediction. In decision-making, goods and activities satisfying extrinsicdesires are more salient than those serving intrinsic needs. Accordingly, there is an overconsumptionof the former compared to the latter. The theoretical analysis is consistent witheconometric evidence on commuting choice using data on subjective well-being. Peopleshow substantial adaptation to a higher labor income but not to commuting. This mayaccount for the finding that people are not compensated for the burden of commuting.