Psychology Methods Hour: Integrating the Reference Point Effect into Normative Decision Theory: Purpose-Based Utility Functions

His presentation will introduce the Prescriptive Utility Reference POint (PURPOse) as a reference point which induces risk-aversion when the individual's true utility function is concave and risk-seeking when the utility is convex. When the individual utility function has multiple inflection points, this leads to a form of hedonic adaptation. When an individual has sufficiently exceeded their purpose, they adopt a new more demanding purpose and focus on achieving that purpose. But when an individual has sufficiently fallen short of that purpose, they switch to a less aggressive purpose. As a result, the utility function implicitly specifies a series of purposes which serve as milestones as the individual's maximizes their utility function. So, by integrating elements of prospect theory into utility theory, Dr. Bordley will demonstrate how utility theory can provide its own normative alternative to using goals to guide decision making.