Intuitions About Declining Marginal Utility

Abstract

In two studies, subjects judged the desirability of distributions of life expectancy or money. Their judgments showed declining marginal utility. That is, they were less sensitive to changes at the high end of each scale. Subjects also made utility ratings of the outcomes of individuals. And they made ratings of the distributions when these were described in terms of utility ratings rather than goods (years or dollars). The judgments of utility ratings showed equivalent declining marginal utility, even though they were based on utilities that themselves declined marginally. People extend their intuition about declining marginal utility to utility itself, as if utility had utility that declined marginally. In one experiment, a similar result was found with gambles: people are risk averse for utility as well as for money. We argue that this is an overextension of a reasonable heuristic and that this heuristic may account for one classic objection to utilitarian distributions.

JEL Classification: D63