Essays on preferences and decision making

Experimental evidence suggests that individual consumption has not only personal value but also enters the social part of the utility. The axiomatic model of preferences in Chapter 1 makes it possible to unambiguously determine personal and social utility without any assumptions about their relationship. The unique separation can be achieved only if the individual choices in different subgroups of other people are available. Preferences over consumption and status are used as an example to demonstrate how the utility is constructed. The model shows what kind of information about choice is needed to experimentally determine the nature of social preferences without making restrictive assumptions.;In Chapter 2 we study experimentally how strong the social ranking preferences are and what characteristics of others influence the perceived ranking. In our experiment the subjects play two games against the computer: a game of skill and a game of luck. After each game the participants observe the winnings of everybody in the group. Each subject has a possibility to reduce the winnings of one other person at a cost to himself. We find that the majority of subjects use this costly option. More importantly, the decisions to subtract money depend on whether the game of skill or luck was played. The pattern of subtractions suggests that winnings made with skill are used as a proxy for social significance and are envied, whereas money won by luck do not convey such a signal.;In Chapter 3 we study how subjects plan ahead when they make sequential decisions. We use a simple combinatorial game of perfect information, with two players alternating, and with a winner and a loser. Subjects in the early stages follow the forward induction analysis. Motivated by the experience of the early defeats they suddenly switch their mode of analysis to backward induction. This way of learning the solution of the game is different from a complete backward induction procedure: Players are unable or unwilling to replace a sub-game with payoff defined by the optimal strategies in the sub-game. Our results indicate why people may find it difficult to plan their financial decisions effectively.