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We introduce a modification of the discounted utility model that accounts for both satiation and habit formation in intertemporal choice. Preferences depend on the satiation level and the habitual consumption level. These two state variables, together with the shape of the value function, drive the properties of the model. One unique feature of our...
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... components of satisfaction, withdrawal, and desirability can be seen in Figure 2. In the figure, the starting point is to mark the satiation level y on the horizontal axis. ...
Citations
... Both characteristics imply that present consumption in ‡uences the utility of future consumption. This observation has prompted researchers to modify the classic DU model to account for these features (Becker, 1996;Pollak, 1970;McAlister, 1982;Wathieu, 1997, Baucells and Sarin, 2007, 2010 Habit formation, satiation, and time inconsistency are all temporal anomalies that describe the observed change-of-taste behavior which contradicts the premise of the choice theory. Instead of looking for ways to make the theory more consistent with human behavior, many academics, from various disciplines, were looking for explanations. ...
... A sketch of the utility functions in equations(7) and(8)with M = 15; m = u(x) = 3; proof of the existence of multiple preference ordering Let the environment be as prescribed in the previous section. In particular, let s ; l ; r ::: be the judgement times of executing activity a = (x; t) in states s; l; r; :::; respectively. ...
The rational choice model under certainty and the discounted utility (DU) and expected utility (EU) models under uncertainty are criticized for their inability to capture many observed temporal behaviors, e.g., satiation, habit formation, and change-of-taste. By considering consumption as an activity , i.e., a combination of goods on the set of prospects X and consumption time on the time set T , this paper shows that the previous temporal anomalies are possible over the extended choice …eld X T: In particular, the present framework demonstrates that the same decision maker could have di¤erent preference ordering in di¤erent psychological states. A key advantage of the present framework over some DU modi…cations that account for satiation and habit formation is that it is less ambiguous about the time attribute of the decision-making process.
... Representatives include [1,5,10,11]. Habituation, mostly used in management scientists, e.g., [2,3,12], assumes adjacent substitutability over time that predicts "the more you get, the less you want". Compared with habit formation in an economic context, habituation exhibits richer implications in modeling customer behaviors, particularly after incorporating diminishing sensitivity, a property of prospect theory's "gain-loss" value function [13]. ...
... McAlister [15] proposes an earlier model of satiation that says that satiation can be an ideal level of consumption inventory over an attribute. Baucells and Sarin ( [12]; BS10 henceforth) further develop a hybridization of satiation and habituation (SH) by synthesizing their SA model and Wathieu's [2] habituation (HA) model. The DU assumes the time independence thereby the period utility is calculated afresh. ...
Tastes change over time. People’s tastes are distorted through two channels: satiation formation and habit formation. In this paper, we develop a theoretical foundation of satiation and habituation by an axiomatic approach. Our theory is based on a hierarchy of preference conditions called compensation independence. The behavioral assumption underlying the preference conditions are the psychological compensation of human beings. I flesh out an axiomatic system for general models of satiation and habit formation, which contains many functional forms in the literature as special cases. Moreover, I advance the axiomatization to accommodate the linear representations of satiation and habit formation that are prevailing in the literature. This paper contributes to the birth of a new generation of the behavioral foundation for modeling satiation and habit formation, which might improve on the current state of the art in understanding people’s tastes over time and preferences. Theoretically, this study contributes to the vein of time-nonseparable preferences.
... Just as in multiattribute choice, relatively few intertemporal choice models accommodate within-option interactions between resolutions even though intertemporal preferences seem highly likely to display interactions. One related line of modelling involves habit formation, found in the model of rational addiction (Becker & Murphy, 1988), the discounted utility model under habit formation Wathieu (1997), the satiation model (Baucells & Sarin, 2007), and the satiation and habit formation model (Baucells & Sarin, 2010). A classic claim is that improving sequences are valued over worsening ones, as if the more proximate experience of plenty will be worsened by the anticipated experience of subsequent poverty (e.g., Loewenstein & Sicherman, 1991). ...
Mathematical and computational decision models are powerful tools for studying choice behavior, and hundreds of distinct decision models have been proposed over the long interdisciplinary history of decision making research. The existence of so many models has led to theoretical fragmentation and redundancy, obscuring key insights into choice behavior, and preventing consensus about the essential properties of preferential choice. We provide a synthesis of formal models of risky, multiattribute, and intertemporal choice, three important domains in decision making. We identify recurring insights discovered by scholars of different generations and different disciplines across these three domains, and use these insights to classify over 150 existing models as involving various combinations of eight key mathematical and computational properties. These properties capture the main avenues of theoretical development in decision making research and can be used to understand the similarities and differences between decision models, aiding both theoretical analyses and empirical tests.
... We start with expressions for how a customer's satiation and habit in one period depends on her habit or satiation level and consumption in previous periods. This dynamics is modeled after the literature on axiomization and modeling of these two behavioral effects (e.g., Baucells and Sarin, 2010;He et al., 2013;Baucells and Zhao, 2020). Subsequently, we obtain a customer's purchase quantity decision from solving the customer's utility maximization problem in each period given a price. ...
... We next adapt this utility function to incorporate satiation and habit. The customer's satiation level at the beginning of period t is denoted by s t , with the following functional form that is consistent with Baucells and Sarin (2010): ...
... The research streams on habit and satiation evolved separately. Baucells and Sarin (2010) developed the first formulation with these effects together. As such the satiation and habit dynamics in (1) and (2) can accommodate various instances considered in the literature. ...
We study a dynamic pricing problem in which a firm chooses prices over multiple periods when consumers are state dependent, i.e., they develop a habit or satiation from their past consumption. We first derive an inter-temporal demand function to capture how demand in one period depends on the price in that period and consumption in previous periods through habit or satiation. Subsequently, we formulate the optimal price setting problem for a firm over a multi-period horizon. We establish that this problem is jointly concave in prices and then characterize the temporal trends in the optimal prices. These trends in optimal prices are a net outcome of two opposite effects: (i) the progressive build up of habit or satiation from consumption, and (ii) the progressive deterioration of the habit or satiation developed in prior periods. Based on the relative strengths of these two effects, the optimal prices follow either a penetration policy (prices increase over time), or a skimming policy (prices decrease over time), or a skimming-penetration policy (U-shaped prices), or a penetration-skimming policy (Inverse-U-shaped prices). Subsequently, we provide several extensions including bounds on prices and optimal profit and non-stationary state dependence. Numerical studies show that ignoring habit and satiation effects in customers can be significantly costly for a firm.
... The initial works like Baucells and Sarin (2007) and Baucells and Sarin (2010) have been further expanded on in Sarin (2013), Das Gupta et al. (2016), and Bernstein et al. (2022). ...
... Furthermore, given the nature of experiential products, where the subjectivity associated with the interpretation of the product makes it harder to reconcile products of differing nature, being recommended music that is of the same type increases the 'processing fluency' (Reber et al. 2004). This reinforcement causes the listener to have a positive bias for similar songs, thereby gaining greater utility from the overall experience than would be suggested from the sum of its parts (Baucells and Sarin 2010). ...
Sequential consumption of experiential products gives rise to inter-temporal associations. Developing recommendation algorithms that account for these effects while designing experiences for users can be effective in enhancing user engagement. Using music streaming as the paradigmatic context of such interactions-consumption of multiple songs across multiple sessions-we construct a utility-based theoretical framework that accounts for users' past consumption, leading to: (a) Recall-based references, that are built on past sessions, and (b) Locally-based references, which are the result of previous songs in the focal session. Users' heterogeneous responses, rooted in the constructs of habit formation and variety seeking, help us understand their dynamic preferences, which are further influenced by the memory decay effects. To validate this theory, we combine music streaming logs of 44,794 paid customers of the global streaming platform, Deezer, across 2018-2019 with the song-attribute data from Spotify to study the relationship between the platform-recommended song-attribute deviation from user references and user engagement with the platform. Engagement is measured via song skipping, duration of song listened to, and session abandonment decisions. Using a matching procedure in conjunction with reduced-form analyses, we find that a 1% increase in the deviation of the recommended song's attributes from the Recall and Local references results in an increase of 0.2% (variety seeking) and a drop of-1.9% (habit formation) in the engagement. Finally, the counterfactual analyses show an increase in user engagement levels of 34.7% above the status-quo at Deezer when implementing our recommendations. An experimental study further supports these results.
... Pathway data and operations management. Our modeling approach is directly connected to the study of customers' behavior in sequential experiences (Baucells and Sarin 2010, Das Gupta et al. 2016, Bernstein and Martínez-de Albéniz 2017 as well as the incorporation of location effects into operational decision-making (Ahmadi 1997, Rajaram and Ahmadi 2003, Abeliuk et al. 2016, Gallego et al. 2020, Aouad and Segev 2020, Guo et al. 2021. Research on path analysis, with works such as the paper by Thiesse and Fleisch (2008), has relied on the usage of RFID (radio frequency identification) technology such as the PathTracker ® system described by Sorensen (2003), with applications to in-store retailing (Hui et al. 2009a(Hui et al. ,b, 2013. ...
... These design choices are consistent with the psychological construct of habit formation, which explains that viewers experience the aesthetic pleasure from cultural objects that engender a higher processing fluency (Reber et al. 2004). This theory implies that visitors prefer to engage with similar artworks consecutively (Wathieu 1997, Baucells andSarin 2010). ...
A fundamental issue faced by experience providers-ranging from retailing to cultural institutions-is to display a collection of items for physical or digital interactions. The arrangement of the exhibits in different locations, which we call the layout, affects the visitors' choices over time and space, thereby driving their engagement with the offered experience. This paper develops a data-driven analytics framework to inform such operational decisions, taking into account visitors' preferences. First, we propose a dynamic choice model, called Pathway MNL, that represents visitor activity as a sequence of conditional logit experiments influenced by the layout. We estimate this model on large-scale data logs of multimedia guide usage at the Van Gogh Museum (Netherlands). Using parametric specifications of the utility function, we uncover significant relationships between visitors' choices and layout distances , artwork characteristics, and other contextual dimensions. Visitors value proximity and variety when locally constructing their path into the museum, but their choices are also influenced by the level of congestion and the number of artworks already seen. Our model predicts the next visitor action with an out-of-sample accuracy of 63%. Natural experiments on the layout provide further empirical validations. Second, we formulate the layout optimization problem, where the goal is to assign artworks to different locations to maximize the expected length of visitors' paths. We establish a strong inapproximability result for this new optimization setting. We identify realistic interventions that can significantly lift visitors' engagement by improving the attractiveness and retention exercised by the layout.
... This implies some useful suggestions for revenue managers to improve their customer segmentation and pricing strategy models; it also makes an empirical contribution by examining HLC, a key influence on WTP. This effect has been cited in microeconomics to explain utility functions (Baucells and Sarin, 2010;Wathieu, 2004), but we know of no empirical applications to specific categories of products/services. ...
... The habit formation model proposed by Wathieu (2004) and the subsequent extension in the habit formation and satiation model proposed by Baucells and Sarin (2010) establish the theoretical framework to explains the change in WTP over each purchase period according to HLC. Building on these models to achieve our research goal, we address three key issues. ...
... Building on these models to achieve our research goal, we address three key issues. First, we demonstrate the explanatory capacity of theories of habit formation and satiation proposed by Baucells and Sarin (2010) and Wathieu (2004). We prove that the HLC has an S-shaped moderating effect on WTP for a tourist accommodation that does not vary between one consumption (t -1) event and the next (t/t + 1) in category or type. ...
The purpose of this study is to test how Willingness to pay (WTP) change depending on habitual level of consumption (HLC), which provokes satiation, sensitization, and habituation responses. Using a longitudinal research, two questionnaires in different purchase occasions measure WTP over three consumption periods (N = 279). We find that HLC exerts an S-shaped moderating effect on WTP, which change from a previous purchase setting relative to new and repetitive purchase. The results show how WTP increases relative to previous consumption if the HLC is moderate (sensitization). However, WTP decreases relative to previous consumption if the HLC is low (satiation) or high (habituation). Regarding implications, these findings can help revenue managers to implement segmentations according HLC to optimize the value captured from customers in each purchase. Besides, we demonstrate empirically the key influence of HLC on WTP, of we know of no applications to specific products or services.
... This model explains satiation from the perspective of the amount consumed and the frequency between consumption periods, consistent with other studies (e.g., Iyengar & Jedidi, 2012). In the habit-formation and satiation model (Baucells & Sarin, 2010), satiation is relativized according to the degree to which one is accustomed to consuming a good in a similar way to that proposed by McAlister (1982). When current consumption exceeds the habitual level of consumption within a given period, consumers become satiated and WTP decreases relative to the previous consumption experience. ...
... A shorter time interval between consumptions (more recent consumption) generates satiation Baucells and Sarin (2010) Repetition of consumption of a certain product (quantity of consumption) ...
... Satiation influences utility in a nonlinear manner; increasing satiation causes a nonlinear decrease in utility in the next purchase period. This is especially noticeable in the first consumption, when a consumer is not accustomed to the enjoyment of this good and quickly becomes satiated because of the product's low assimilation capacity (Baucells & Sarin, 2010). Therefore, we propose the following hypothesis: ...
This study aims to contrast the nonlinear moderating effect of satiation—an emotional variable with proven influence over different consumer behaviors—on consumers' willingness to pay (WTP). With a longitudinal survey, the authors measured WTP across two stays for the same type and category of tourist accommodation. The results indicate that satiation exerts a U-shaped moderating effect on the relationship between WTP across two repeat purchases of hedonic use service. Further, satiated customers are willing to pay up to 11.2% less than their previous stay, which contributes to satiation, hospitality, and hotel pricing literature.
... Earlier studies on the EU framework can be found in [6][7][8]. Using EU for measuring subjective happiness of individuals is prevailing, such as the literature [2,9,10]. ...
... Goldstein [28] says that craving is an intense and overwhelming desire that leads to impulsive and vague decisions. Baucells and Sarin [10] formulated that craving comes from negative satiation on past consumptions that further derives from the unmet need in the past. This section studies the mechanisms and implications of craving predicted by the AM model (Section 3.1) and the hybrid WB model (Section 3.2). ...
... Under certain conditions, [10]'s satiation and habituation (SH) model has similar predictions on craving. Our definition of craving resembles that of [10]: the moment utility over a unit outcome is higher than that at the neutral level. ...
The origin of happiness arouses people’s curiosity for a long time. Recent research introduces a utility theory for measuring subjective happiness in a social context. The past recent monetary conditions influence the present subjective happiness through two distinct channels: interpersonal comparison and self-adaptation. In this paper, we develop this theory to analyze behavioral patterns. Together with prospect theory’s gain-loss utility function, we exploit the theory in predicting psychological phenomena of craving. We explore the relationships between happiness and earnings. Under certain conditions, a high payoff disappoints you immediately and even leads to continuous disappointment across periods. We extend the explanations of the scenarios of New York cabdrivers’ labor-supply decisions. The effect of social comparisons may trigger workers’ behaviors of quit-working, which deepen related understandings of the literature.
... Alternatively, investors and decision makers, may just be interested to that maximal β that will preserve ISD-1 feasibility. Notice that such β can be even updated dynamically according to previous decisions and investment outcomes (Baucells and Sarin 2010;Strub and Li 2019). We use the quantile method to derive a sample-based β in our numerical tests. ...
We introduce a new stochastic dominance relationship, the interval-based stochastic dominance (ISD). By choosing different reference points, we show that ISD may span a continuum of preferences between kth and \((k+1)\)th order stochastic dominance (SD). We distinguish accordingly between interval-based (or shortly just interval) SD of order 1 and of order 2: the former spanning from first- to second-order stochastic dominance, the latter from second- to third-order stochastic dominance. By examining the relationships between interval-based SD and SD, as well as between ISD and risk measures or utility functions, we frame the concept within decision theory and clarify its implications when applied to an optimal financial allocation problem. The formulation of ISD-constrained problems in the presence of discrete random variables is discussed in detail and applied to a portfolio selection problem.
