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Thinking and Deciding 13: Utility Measurement

09/22/2013

Decision analysis and related measurement

Decision analysis is the application of the utility theory to decisions. Usually utility theory is normative, because it is just not practical to apply it directly to problems. But, in certain circumstances we can apply it prescriptively. This chapter looks at how to assign utility to specific decisions. Decision analysis is like cost-benefit analysis, except it measures utility, not money.

The measurement of utility

This is one of the most interesting segments of the book, since it tries to tackle such a fundamental and tricky question: how to measure utility. There are a few different strategies Baron suggests.

There’s not really any objective way to measure utility. There’s no way to measure “utils.” So ratios are what matter, since utility is used to choose one thing over another.

Time tradeoffs are one strategy to determine rations. One might ask “how many days of headaches are as bad as 1 day of lower back pain?” If a person says 2, then that means lower back pain is twice as bad as headache.

There’s also the person tradeoff. “Say you could cure 100 people of back pain, or X people of headaches? What would X have to be in order for the choices to be even?” If the person says 500, then back pain is judged 5 times as bad as headaches.

Now of course this is just judged or decision utility, not true utility. People often make inconsistent choices, either depending on how the problem is presented, or based on their understanding of the question or the scenarios. When one tries to put multiple decisions together, they usually don’t match up ratio wise.

Adaptation is one big problem in judging expected utility. Blind people rate their lives about as highly as non-blind people, even when their blindness occurs later in life. They adapt to their problems. And yet most people consider blindness to have very high disutility.

There’s also a measure of willingness to pay. “How much would you pay to save 1,000 bird species from going extinct?” Unfortunately, humans are scope-insensitive, and care about 10,000 people about as much as they care about 1,000,000.

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