Measuring Marginal Utility By Reactions To Risk

Abstract

Previous attempts to measure marginal utility from consumer budgets, demand curves, prices, or choices have been unsuccessful, due in part to inadequate data and questionable fundamental assumptions. This article proposes a new method for measuring marginal utility by studying individual reactions to choices involving risk. This method rests on the principle that rational behavior can be described by maximizing the mathematical expectation of some function. By observing choices among alternatives involving risk, it may be possible to discover the “utility” function that individuals use to make decisions. While the application of this theoretical analysis to actual data faces significant challenges, the approach offers a more concrete interpretation of utility and a more direct connection to problems of social policy, particularly the distribution of income. – AI-generated abstract.