Reijo Mykkänen

Aspiration-based utility functions in a planning model for timber flow management

Mykkänen R. (1994). Aspiration-based utility functions in a planning model for timber flow management. Acta Forestalia Fennica no. 245 article id 7507. https://doi.org/10.14214/aff.7507

Abstract

The study presents a theory of utility models based on aspiration levels, as well as the application of this theory to the planning of timber flow economics. The first part of the study comprises a derivation of the utility-theoretic basis for the application of aspiration levels. Two basic models are dealt with; the additive and the multiplicative. Applied here solely for partial utility functions, aspiration and reservation levels are interpreted as defining piecewisely linear functions. The standpoint of the choices of the decision-makers is emphasized by the use of indifference curves. The second part of the study introduces a model for the management of timber flows. The model is based on the assumption that the decision-maker is willing to specify a shape of income flow which is different from that of the capital-theoretic optimum. The utility model comprises four aspiration-based compound utility functions.

The theory and the flow model are tested numerically by computations covering three forest holdings. The results show that the additive model is sensitive even to slight changes in relative importance and aspiration levels. This applies particularly to nearly linear production possibility boundaries of monetary variables. The multiplicative model, on the other hand, is stable because it generates strictly convex indifference curves. Due to a higher marginal rate of substitution, the multiplicative model implies a stronger dependence on forest management than the additive function. For income trajectory optimization, a method utilizing an income trajectory index is more efficient than one based on the use of aspiration levels per management period. Smooth trajectories can be attained by squaring the deviation of the feasible trajectories from the desired one.

Keywords
bounded rationality; income trajectories; capital theory; intertemporal choice; resource economics

Published in 1994

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