Adaptive utility

Abstract

This paper models the real-time adaptation of utility when individuals have a limited capacity to make fine distinctions. A simple adaptive mechanism is proposed that adapts utility to an arbitrary distribution of rewards in a way that is ultimately optimal, in terms of minimizing the probability of errors. A modified simple mechanism is approximately optimal in terms of maximizing expected utility. The model generates the so-called “hedonic treadmill” and induces a preference for rising consumption.