1 Approaches to Behavioral Welfare Economics Building on the 20 th Century Economic Tradition More...
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1 Approaches to Behavioral Welfare Economics Building on the 20 th Century Economic Tradition • More than one agent per person – e.g. hyperbolic discounting – a problem of welfare aggregation across agents • Confusion (Cognitive Economics) – Preferences when well-informed and thoughtful are what count—a data issue • Preferences over emotions
1 Approaches to Behavioral Welfare Economics Building on the 20 th Century Economic Tradition More than one agent per person –e.g. hyperbolic discounting
1 Approaches to Behavioral Welfare Economics Building on the 20
th Century Economic Tradition More than one agent per person e.g.
hyperbolic discounting a problem of welfare aggregation across
agents Confusion (Cognitive Economics) Preferences when
well-informed and thoughtful are what counta data issue Preferences
over emotions
Slide 2
2 Preferences Over Emotions (Emotions in the Utility Function)
People care about how they feel Preferences over ultimate goods
(including emotions) can be taken as totally standard Emotions can
have complex household production functions Everything the person
can control is an argument. The function itself cannot be chosen.
Psychological data pin down the production function for the
emotionthus, in principle there are no extra degrees of freedom
beyond those in a standard utility function with the same number of
arguments.
Slide 3
3 Example 1: Anger People care whether they feel angry or not.
People want to be angry in certain situations. In other situations
they want to not be angry. (Anger is an argument of preferences.)
The genesis of anger is probably related to expectations and to
preferences. If someone acts against our interests (=preferences)
more than we would expect them to, we are more likely to feel
angry. (Expectations and preferences are arguments of the
production function for anger.) Note the circularity:
angerpreferences indirect utility will be determined by a
fixed-point mapping.
Slide 4
4 Example 2: Happiness People care whether they feel happy or
not. Mostly, people would prefer to feel happier. (Happiness is an
argument of preferences.) How happy one feels seems to involve
(among other things) how well one is doing relative to expectations
in relation to ones preferences. (Expectations and preferences are
arguments of the production function for happiness.) Note the
circularity: happinesspreferences indirect utility will be
determined by a fixed-point mapping.
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5 The Economics of Happiness Miles Kimball
Slide 6
6 What I Know about Happiness Utility and Happiness, by Miles
Kimball and Robert Willis (Not your usual paper about happiness. We
may be wrong, but we are definitely different.) Unhappiness After
Hurricane Katrina by Miles Kimball, Helen Levy, Fumio Ohtake and
Yoshiro Tsutsui The Dynamics of Happiness: Evidence from Daily
Panel Data by Miles Kimball, Fumio Ohtake and Yoshiro Tsutsui The
Dynamics of Happiness After Major Life Events by Miles Kimball and
Daniel Silverman Conversations with Norbert Schwarz
Slide 7
7 Why Happiness Matters for Economics 1. Preference for
Happiness: Many people value happiness, as evidenced by the fact
that they will sacrifice other things for the sake of happiness. 2.
News and Happiness: Short-run spikes and dips in happiness signal
what people consider good and bad news, which in turn signals what
they care about.
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8 Two Definitions of Happiness The Greatest Good for an
Individual Feeling Happy
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9 Who Judges the Greatest Good for an Individual? An Authority
Figure or the Speaker True Happiness used as a cudgel Economics
Defers to the Individual Utility
Slide 10
10 Measuring Happiness, in the Narrow Sense of Feeling Happy On
a scale from one to seven, where one is extremely unhappy and seven
is extremely happy, how do you feel right now?
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11 Greater Happiness in the Narrow Sense is Not Always a Good
Thing Mania: too much happiness Too much sacrificed for the sake of
feeling happier Example: changing ones political beliefs in order
to be happier.
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12 Distinguishing preferences and happiness as a matter of
logic. Preferences (Represented by Lifetime Utility) = The extent
to which people get what they want, where what they want is
revealed by their choices. Happiness (Current Affect) = How
positive peoples feelings are at a given time.
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13 The Ethical Question Peoples own choices and feelings are
the two non-paternalistic indicators we have for individual welfare
(what makes an individual better off in the sense relevant for
policy). A priori, both seem useful. What if public policy choice A
accords with what people would choose, but policy choice B would
make them feel best?
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14 The Neobenthamites Currently, the standard view among
psychologists and most economists working with happiness
dataarticulated most forcefully by Daniel Kahnemanis that a present
discounted value of measured happiness is a good indicator of what
people should be maximizing. To the extent that people are
maximizing something else, it is viewed as a mistake. Factual
mistakes people make in predicting their own future happiness are
thought to be an important reason people make these optimization
mistakes. (Return to this below.)
Slide 15
15 Our View Bob Willis and I are questioning this orthodoxy.
When well-informed and thoughtful, we view peoples choices as the
best indication of their individual welfare. People do often make
optimization errors. But much of what this orthodoxy takes as
evidence of optimization errors, we take as evidence that utility
and happiness are not the same thing.
Slide 16
16 Utilitarianism (Jeremy Bentham, John Stuart Mill) The
greatest good of the greatest number Solving social problems is
important because it is a miserable experience to be poor, sick or
downtrodden. It is also important to make things better, wherever
we can, even if they are already good. Utilitarianism is part of
the philosophical foundation of economics.
Slide 17
17 Measuring Utility: The Modern Tradition of Economics Look at
an individuals choices (preferences). What an individual chooses
indicates what she wants, cares about and values. This works well
when the individual is Well informed Thoughtful Not at war with
self
Slide 18
18 Evidence that UtilityHappiness 1.People who knowingly,
thoughtfully and without regret choose not to maximize long-run
happiness indicate that utilityhappiness for them. 2.People make
choices eagerly that they never regret, but which have no long-run
effect on how happy they feel. Moving to a new city Buying a nice
car 3. People thoughtfully make choices that they never regret,
which lower their long-run felt happiness. Commuting further to a
higher-paying job. Longer working hours to put ones child through
college. Having a baby? Doing ones duty.
Slide 19
19 The Nature of Happiness (What Makes Us Feel Happy)
Slide 20
20 Key Facts about What Makes Us Feel Happy #1: Easterlin
Paradox #2: Hedonic Adaptation
Slide 21
21 The Easterlin Paradox
Slide 22
22 The Evidence of Choices: Migration Flows Indicate that
Income is Valuable to People Per capita GDP in Mexico is not far
from what it was in the U.S. in the 1950s. Large numbers of
Mexicans choose to migrate to the U.S. Among the many costs of
migration, their social rank often drops drastically when they
migrate to the U.S. Despite this, they come.
Slide 23
Reevaluating the Easterlin Paradox Betsey Stevenson and Justin
Wolfers challenge the facts behind the Easterlin Paradox, except
for the U.S. Jean-Benoit Rousseau confirms these findings and adds
insight about the U.S. However, Stevenson and Wolfers show that
womens happiness has declined relative to mens, which is equally
paradoxical. 23
Slide 24
24 Fact #1 In the long run, people can become better off
without feeling happier.
Slide 25
25 Hedonic Adaptation: This, too, shall pass. 1. After time has
passed, things that surely had a big effect on happiness right
after the event have surprisingly little effect on happiness. (Not
just money.) incarceration loss of the use of limbs serious burns
death of a spouse winning the lottery 2. The dynamics of national
happiness after news 3. The dynamics of happiness after major life
events 4. The dynamics of happiness: evidence from daily panel
data
Slide 26
26 Unhappiness After Hurricane Katrina Miles Kimball Helen Levy
Fumio Ohtake Yoshiro Tsutsui
Slide 27
27 USA: The Happiness Index on the Reuters/UM Surveys of
Consumers Now think about the past week and the feelings you have
experienced. Please tell me if each of the following was true for
you much of the time this past week: 1.Much of the time during the
past week, you felt you were happy. (Would you say yes or no)?
2.(Much of the time during the past week,) you felt sad. (Would you
say yes or no?) 3.(Much of the time during the past week,) you
enjoyed life. (Would you say yes or no?) 4.(Much of the time during
the past week,) you felt depressed. (Would you say yes or no?)
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33 Implications of the October Dip in Happiness It is difficult
to explain this dip in happiness on the grounds that lifetime
utility is seriously effected in terms of self-interest. If this
dip in happiness is due to altruism, the happiness data told us
something we might not otherwise have known: Americans cared quite
a bit about those hurt by the earthquake in Pakistanmore than one
would suspect from the donation data. Katrina and Rita: >$2.65
Billion South Asian Tsunami: >$1.55 Billion
Slide 34
34 What does it mean to say that lifetime utility has fallen
permanently? Revealed Preference is the measure of lifetime
utility. If there were a lever to magically undo the damage of
Katrina, we would pull it. True for the harm to others. True for
the harm to self, narrowly construed. True even if the past cannot
be changed but only the harm from now on reversed.
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38 The Dynamics of Happiness After Major Life Events June 5,
2007 Dan Silverman and Miles Kimball Using HRS data to observe the
relationships between economically quantifiable life-events, such
as the death of a spouse, and a quantifiable measure of
happiness.
Slide 39
39 Introduction Exploring the relationships between dramatic
life-events and happiness, using longitudinal data from the HRS.
Current work considers the death of ones spouse, life- insurance,
and associated levels of a happiness index. We define our happiness
index using the Center for Epidemiologic Studies Depression Scale
(CESD) questions in the HRS. We use data from individuals reports
on dates of spousal death and information on spousal
life-insurance. We consider men and women together and separately.
We also consider those with and without life-insurance.
Slide 40
40 Non-parametric estimates, w/controls
Slide 41
41 With Life Insurance: Non-Parametric estimates (no FE)
Slide 42
42 Parametric estimates, no fixed effects: MEN
Slide 43
43 Parametric estimates, no fixed effects: WOMEN
Slide 44
44 Parametric estimates, no fixed effects: w/ LIFE
INSURANCE
Slide 45
45 Parametric estimates, no fixed effects: NO LIFE
INSURANCE
Slide 46
46 Findings Quick Hedonic Adaptation (Mean Reversion of
Happiness) Men react more than women Those without life insurance
react more than those who do have life insurance.
Slide 47
47 Two Strategies for Using Happiness Data to Value Non-
Marketed Goods Divide the effect of the non-marketed good on the
long-run level of happiness by the effect of money on the long-run
level of happiness. Divide the effect of news about the non-
marketed good on the dynamics of happiness (lost area under the
curve) by the effect of news about money on the dynamics of
happiness.
Slide 48
48 The Dynamics of Happiness: Evidence from Daily Panel Data
Miles Kimball, Fumio Ohtake and Yoshiro Tsutsui RAs: Yuki Kosaka
and Noah Smith
Slide 49
49 Japan: The Osaka University Panel Study of Happiness
Dynamics 71 Osaka University Undergraduates 49 male, 22 female
Answered daily web survey for 273 days (so far). Often used
web-capable cell-phones High response rates Total of 17258
person-day observations
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50
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51 Top of the First Page of the Paper Version
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52
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53 Personal News
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54 National News
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55 Histogram of Average Happiness (averaged across
individuals)
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56 Histogram of Average Personal News Ratings
Slide 57
57 Histogram of Average National News Ratings
Slide 58
58 Scatterplot of Happiness vs. Same- Day Personal News
Slide 59
59 Scatterplot of Happiness vs. Same- Day National News
Slide 60
60 Average Happiness vs. Average Personal News Rating
Slide 61
61 Average Happiness vs. Average National News Rating
Slide 62
62 Empirical Strategy Estimate the time series effect of
innovations in personal and national news on happiness. Allow for
individual fixed effects Regress personal news ratings on their own
lags and treat the residuals from this regression as true personal
news innovations (whitened personal news) Do the same for national
news ratings to construct whitened national news. Check for
nonlinearities in the relationship between news ratings and
happiness.
Slide 63
63 News Ratings vs. Lifetime Utility Innovations Our
theoretical concept of news is innovations in information about
lifetime utility. These innovations should be unpredictable.
However, the ordinary language meaning of good news and bad news
may be somewhat predictable. We will purge the component of the
news ratings that are predictable by past news ratings. We expect
some remaining predictability of news ratings as todays information
is sometimes treated as tomorrows expected news. The theory then
implies that todays reported happiness should be correlated with
tomorrows news ratings even after controlling for current and past
news ratings.
Slide 64
64 Daily Happiness vs. Daily Personal News
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65 Increments (Personal)
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66 Cumulative Increments (Personal)
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67 Daily Happiness and Daily National News
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68 Increments (National)
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70 Whitening (Personal)
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71 Whitening (National)
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72 Impulse Response (Personal & National)
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73 Impulse Response (Personal)
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74 Impulse Response (National)
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75 Component Impulse Responses (Personal News)
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76 Component Impulse Responses (National News)
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77 Impulse Response + Neg. Sensitivity (Personal)
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78 Impulse Response + Neg. Sensitivity (National)
Slide 79
79 Fact #2 about Happiness Happiness depends more on changes
than on the absolute level of ones circumstances. Analogy: We have
no altimeter in our brains, but we can tell whether we are going up
or down.
Slide 80
80 The Elation Theory of Happiness Experienced happiness is the
sum of two components: elation: short-run happiness that depends on
recent news about lifetime utility baseline mood: long-run
happiness that depends on ones daily actions
Slide 81
Project 2: Well-Being and Utility in Economics Project Leader:
Miles Kimball Co-Investigators: David Albouy, Daniel Benjamin, Dan
Silverman, Robert Willis (+Jean-Benoit Rousseau)
Slide 82
A. Specific Aims 1.Continue to develop and validate the
technique of using the short-run dynamics of happiness to gauge the
size of shocks to lifetime utility. 2.Analyze the determinants of
long-run happiness using the HRS psychosocial leave-behind.
3.Compare different methods for valuing non-market goods.
Slide 83
A. Specific Aims (cont.) 4. Examine the relationship between
happiness literacy, degree of preference for happiness, time budget
and happiness. 5. Test the implications of the elation theory for
measuring marginal utility.
Slide 84
B. Background and Significance 1.Valuing Non-Market Goods
2.Dealing with the Possibility of Mistakes 3.The Claims of the
Existing Economic Literature on Happiness a. Long-run happiness
regressions can value non-market goods?? b. Happiness data can
diagnose mistakes?? 4. Price Theory of Happiness 5. Marginal
Utility in Empirical Economics
Slide 85
C. Preliminary Studies 1.Elation Theory of Utility and
Happiness 2.Empirics of Elation Determination a.Financial and
Non-Financial Dimensions of Major Life Events in the HRS b.Katrina
c.Elections d.Daily Web Panel of News and Happiness 3.Happiness and
Expectations
Slide 86
C1. Elation Theory of Utility and Happiness a. HappinessUtility
1.Utility = U(Happiness, Other Goods) 2.Maximizing Happiness is Not
the Object b. Happiness Dynamics and Innovations to Lifetime
Utility 1. Happiness = Baseline Mood(Genes, Time Use, Goods) +
Elation(Recent News About Lifetime Utility) 2. Hypothesis: Size of
Innovation to Lifetime Utility is Proportional to the Extra Area or
Lost Area Under a Graph of Happiness Versus Time. 3. Intensity and
Duration of Effects on Happiness
Slide 87
C1b4: Model of the Short-Run Dynamics of Happiness Happiness it
= i + i f(V i,t) + it i = Individual Fixed Effect i = Emotional
Sensitivity Parameter t = Time Lapse Since Shock V i = H(W) + J(Z);
W=Wealth; Z=Non-Mkt Wealth Shock: V i = H(W 0 +W) - H(W 0 )
Non-Market Shock: V i = J(Z 0 +Z) J(Z 0 )
Slide 88
C2a. Empirics of Elation: Major Life Events in the HRS
1.Variation in both the financial and non- financial dimensions of
dated shocks: widowing, divorce, health events 2.Imputing a value
based on the dynamics of happiness in reaction to the financial and
non-financial dimensions of shocks 3.Exponential: no evidence
within HRS that duration depends on size of shock
Slide 89
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Parametric Estimates, By Life Insurance Status Parameter With
Life Insurance Point estimate (s.e.) Without Life Insurance Point
estimate (s.e.) c 84.42 (1.21) 80.53 (2.05) -2.27 (1.61) -4.47
(2.68) -4.50 (3.72) -5.53 (6.19) -24.66 (5.26) -56.58 (12.62) 0.120
(0.045) 0.227 (0.076)
Slide 91
C2b. Empirics of Elation: Katrina 1.Important national news
events can have a significant effect on average happiness in the
U.S. 2.Even for Hurricane Katrinaa quite big eventthis effect was
short-lived, lasting only a few weeks. 3.The dip in the average
happiness in the U.S. after Katrina may provide non- market
evidence of altruism.
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C2c. Empirics of Elation: Elections 1.Partisan movements in
happiness near elections reflect heterogeneity in preferences over
non-market goods. 2.Happiness reaction depends on both intensity of
political preferences and expectations. (2006 elections)
3.Potential for validation of happiness movements as a strength of
preferences measure.
Slide 94
C2d. Empirics of Elation: Daily Web Panel 1.Subjective ratings
of both personal and national news (-5 to +5 scale of bad news to
good news) are tightly related to subsequent happiness dynamics.
2.News on a given day affects happiness for about two weeks.
3.Personal news has a bigger effect on happiness than national
news. 4.Proportional: duration is indep. of size
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C3. Happiness and Expectations a.Both the individual fixed
effect component of happiness and variations in happiness are
related to expectations reports b.Interesting variations in which
types of expectations measures are affected most c.Weather can be
used as an instrument to see if variations in happiness can cause
shifts in expectations d.Are these shifts in expectations shifts
that affect behavior? Sunny days and stock mkt.
Slide 102
D. Research Design and Methods 1.Continue to develop and
validate the technique of using the short-run dynamics of happiness
to gauge the size of shocks to lifetime utility. 2.Analyze the
determinants of long-run happiness using the HRS psychosocial
leave-behind. 3.Compare different methods for valuing non-market
goods.
Slide 103
D. Research Design and Methods (cont.) 4. Examine the
relationship between happiness literacy, degree of preference for
happiness, time budget and happiness. 5. Test the implications of
the elation theory for measuring marginal utility.
Slide 104
D1. Developing and Validating Techniques for Using Elation to
Measure Utility Shocks a.Continue SCA data collection b.Daily Web
Panel on the ALP in collaboration with Osaka University
c.Experiments dosing people with money Vary amount, probabilities
and time lapse Establish functional form of happiness dynamics in
relation to monetary values probabilities and time. Feeds into
design of MU elicitation
Slide 105
D2. Analyze determinants of long-run happiness with HRS
psychosocial leave-behind. a.HRS Psychosocial Leave-Behind has rich
data on hobbies; religious attendance, belief and prayer; quality
of relationships with spouses, children, relatives, and friends;
loneliness; positive and negative thinking; quality of local
community, locus of control; perceived discrimination; past
traumas; management of emotions; rank on social ladder;
addictions;
Slide 106
D2. Analyze determinants of long-run happiness with HRS
psychosocial leave-behind. a. anxiety; job quality; date of being
robbed, death of child, natural disaster, assault, life-threatening
illness or accident, physical abuse. b.Extra data on happiness.
c.Preference for happiness makes the production function for
long-run happiness matter. d.Feeds into subprojects D3 and D4.
Slide 107
D3. Compare different methods for valuing non-market goods.
a.Elation-based measures on HRS b.Ratios of happiness regression
coefficients as in the existing happiness literature. Use rich
psychosocial leave-behind data doubles as an investigation of the
determinants of baseline mood. c. Hypothetical-revealed-preference
and predicted happiness measures using vignettes
Slide 108
D4. Happiness Literacy and Happiness a. Retirement Makes
Possible the Major Input Into Long- Run Happiness: Time b. Factors
That May Limit Happiness: 1.May Not Know the Household Production
Function for Happiness 2.May Not Want to Make Feeling Happy a
Priority c. Develop New Measures 1.Happiness Literacy 2.Preference
(Motivation) for Happiness d. Implement New Measures as an HRS
Module and Compare to HRS Measure of Happiness
Slide 109
D5. Test the implications of the elation theory for measuring
marginal utility. a.Marginal utility of wealth a key concept for
life-cycle C and labor supply; ALP planned to have C and labor
data. b.Happiness does not measure utility, but the magnitude and
duration of short-run spikes in happiness should be a useful
indicator of marginal utility. c.We can elicit such an indicator of
marginal utility on the ALP.
Slide 110
Reminder: Model of the Short- Run Dynamics of Happiness
Happiness it = i + i f(V i,t) + it i = Individual Fixed Effect i =
Emotional Sensitivity Parameter t = Time Lapse Since Shock V i =
H(W) + J(Z); W=Wealth; Z=Non-Mkt Wealth Shock: V i = H(W 0 +W) -
H(W 0 ) Non-Market Shock: V i = J(Z 0 +Z) J(Z 0 )
Slide 111
D5c. Collecting an Indicator of Marginal Utility on the ALP
Measure Happiness Random doses of $5 to $50, with average expense
of $15--$20 per respondent. Ask expectations questions to provide
time lapse AND study the effects of exogenous movements in
happiness on expectations Measure Happiness Again
Slide 112
112 An Integrated Theory of Utility and Happiness A. Preference
for Happiness: Many people value happiness, as evidenced by the
fact that they will sacrifice other things for the sake of
happiness. B. News and Happiness: Short-run spikes and dips in
happiness signal what people consider good and bad news, which in
turn signals what they care about.
Slide 113
113 Preference for Happiness Axiom: Preferences depend on the
joint stochastic process of S: vector of state variables C: vector
of control variables H: current happiness (affect) B: other outputs
of household production functions (e.g. health) There is an
intertemporal expected utility representation over these ultimate
goods at least weakly increasing in H at every date and in every
state of nature.
Slide 114
114 Evidence in Favor of a Preference for Happiness The
preference for happiness shows up in both household and firm
behavior: Purchases of therapy, Prozac, self-help books, magazines
featuring happiness. Advertising that tries to suggest that a
product will make one feel happy.
Slide 115
115 Contrast with the Neobenthamite View People value happiness
(and will sacrifice other goods for it) versus People should be
maximizing happiness (often interpreted as saying that happiness is
the true utility function).
Slide 116
116 Arguments of Happiness beyond S,C,B J t = state variables
that do not matter directly for preferences but affect household
production: genes, underlying physical and psychological states,
unknown parameter values and shocks. Q t = control variables that
do not matter directly for preferences, but affect household
production of happiness (empty set? psychoactive and other medical
drugs, recreational drugs?) v t, v t-1, v t-2, = the history of
lifetime utility. (Note: B=B(S,J,C,Q))
Slide 117
117 News and Happiness The relationship between circumstances
and happiness is weak in the long run, BUT No one disputes that in
the short run happiness responds in an intuitive way to news about
lifetime utility. Thus, we argue that an important component of
happiness is due to recent news about lifetime utility.
Slide 118
118 The News and Happiness Axioms 1.Happiness at time t is a
function of the other ultimate goods, S, C and B, an additional
state variable vector J (unobserved?) an additional control
variable vector Q, and the history of realized lifetime utility v
through time t. --Holding all other arguments of happiness fixed,
the agent is 2. Happier if current expected lifetime utility is of
a preferred future. 3. Less happy if past expected lifetime utility
was of a preferred future.
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119 Simultaneous Determination of Utility and Happiness News
and Happiness Axiom 4 is an ordinal version of the kind of
assumptions that guarantee a contraction mapping, so that there is
a well-defined solution to the simultaneous determination of
utility and happiness. Although preferences over ultimate goods
exhibit intertemporal expected utility, the derived preferences
over the fundamentals (S, J)=K and (C,Q)=X can exhibit reference-
dependence and loss aversion as in Prospect Theory.
Slide 120
120 Lifetime Utility in the Additively Separable Case
Slide 121
121 The Innovation in Lifetime Utility v (Additive
Separability, Observed K) Note about the lifetime utility
innovation: so
125 The Elation Theory of Happiness (In Words) Experienced
happiness is the sum of two components: elation: short-run
happiness that depends on recent news about lifetime utility
baseline mood: long-run happiness that is the output of a household
production function (like health, entertainment, or
nutrition.)
Slide 126
126 Key Implications of the Happiness and News Axioms A theory
of happiness can be described in terms of the objects that are
well-defined by revealed preference: The fundamentals (state and
control variables and outputs of household production functions)
that people care about and The history of which indifference curves
for lifetime plans one has been on. Old news about the future
matters less for happiness than recent news about the future.
Slide 127
127 Loss Aversion from Elation Theory: Happiness Additively
Separable with Elation Concave in Lifetime Utility Innovations
U(K,X,H,A)=F(K,X)+M(K,X) + 0 min( t, t /2) + 1 min( t-1, t-1 /2)
+
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128 Elation-Independence: Additively Separable Happiness with
Elation Linear in Lifetime Utility Innovations
U(K,X,H)=u(K,X)+M(K,X) + 0 t + 1 t-1 +
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129 Factual Mistakes about Happiness Need Not Cause Decision
Mistakes Given rational expectations, adding a linear combination
of lifetime utility innovations to the utility function has no
effect on the preferences represented. In this case, mistakes about
the rate of hedonic adaptation cause no harm to utility
maximization. However, mistakes about the controllable determinants
of baseline mood will cause material harm.
Slide 130
130 Elation and Hedonic Adaptation Because it is based on
recent news, elation fades, News doesnt stay news for very long.
The initial burst of elation dissipates once the full import of
news is emotionally and cognitively processed. This can help
explain why, in the long run, becoming better off may not lead to
greater happiness.
Slide 131
131 The Evolutionary Psychology of Elation and Dismay
Functionally, elation and dismay may motivate cognitive
processingmuch like curiosity. Elation: after good news, it pays to
think what you did right, so you can do it again think how to take
advantage of the new opportunities Dismay: after bad news, it pays
to think what you did wrong, so you can avoid doing it again think
how to mitigate the harm of the bad news Curiosity: after news that
is neither clearly good nor bad, it pays to learn more for the sake
of option value
Slide 132
132 The Evolutionary Psychology of Hedonic Adaptation Analogy:
Adjustments in the pupil of the eye protect the eye and enhance
sensitivity. Protect: Being too happy or too sad has physical
costs. Hedonic adaptation protects from these costs. Enhance
Sensitivity: Hedonic adaptation may also increase our sensitivity
to, and motivation to make, local changes in our objective
circumstances. (Frederick and Loewenstein)
Slide 133
133 Speculations on The Evolutionary Psychology of Baseline
Mood High social rank makes it safe to look more for opportunities
than for dangers. Thus, it makes sense to stimulate the same
machinery turned on by the receipt of good news. Optimists and
pessimists need each other. Quirks in the system? Pinkers
cheesecake
Slide 134
134 Raising Baseline Mood: How to Raise Happiness in the Long
Run 1.Prozac and Talk Therapy 2.Taking Care of Oneself Sleep
Exercise Eating well 3.Enjoyable Activities Spending time with
friends An engrossing hobby
Slide 135
135 How to Raise Happiness in the Long Run (cont.) 4. Positive
attitudes Gratitude Forgiveness Acceptance of ones situation
5.Raising ones social rank
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136
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137 The Problem with Happiness from Social Rank The usual
strategies for raising social rank are a zero sum gameanything that
works for one person makes everyone else worse off by lowering
their social rank However, we can Choose the right pond Help the
unfortunate Treat one another with dignity
Slide 138
138 Do People Know the Production Function for Baseline Mood?
Just as people dont know the true production function for health,
they may not know the true production function for baseline mood.
Lack of understanding of the dynamics of the elation mechanism
could make it difficult for individuals to parcel out the
determinants of baseline mood. The discovery and dissemination of
facts about the determinants of baseline mood could have large
positive welfare effects A big deal if the share of the money and
time budget devoted to baseline mood trends up.
Slide 139
139 Do People Know Their Own Utility Functions? Not perfectly.
For example, I dont know if I will like a new flavor of ice cream.
Lack of knowledge of ones own utility function can be modeled as an
internal informational constraint. (Rayo-Becker is an example.) The
key distinguishing features of mistakes about ones own utility
function are regret changing ones mind after learning more.
Slide 140
140 Why are Utility and Happiness Confused? Because they are
dramatic, elation and dismay may dominate peoples perception of
happiness. Everyone wants good news. That is, everyone wants what
spikes in happiness signal. Not everyone values the emotional
spikes per se, as distinct from what they signal. Not everyone will
sacrifice other goods for the long-run happiness that remains even
when there is no good or bad news.
Slide 141
141 A Non-Judgmental View of the Effect of Materialism on
Happiness Materialism lowers happiness (weak, but interesting
evidence). Tradeoff between happiness and other goods. Materialism
means higher preferences for other goods compared to
happiness.
Slide 142
142 Evidence in Favor of a Preference for Happiness The
preference for happiness shows up in both household and firm
behavior: Purchases of therapy, Prozac, self-help books, magazines
featuring happiness. Advertising that tries to suggest that a
product will make one feel happy.
Slide 143
143 Applying Price Theory to Baseline Mood: The Demand for
Prozac If you learn more about the household production function
for happiness, your behavior will change in a direction that takes
advantage of that to raise happiness. Example: Demand for Prozac
will go up if information arrives that it is more effective in
raising happiness than previously thought (with no new information
about side effects). Demand will go down if information arrives
that it is less effective at raising happiness than previously
thought.
Slide 144
144 Applying Price Theory to Baseline Mood: The Easterlin
Paradox Revisited Normality of baseline mood leads to a version of
the Easterlin Paradox even in the context of our theory: Why dont
people buy higher baseline mood as part of their expanding
consumption bundle?
Slide 145
145 Why Doesnt Rising Income Lead to Greater Happiness? 1. Lack
of Understanding of Happiness? 2. More internal conflicts from
greater income? obesity drug use 3. Negative externalities from
others freedom? breakdown of community divorce 4. Resources spent
on increased lifespan? 5. Raising ones happiness takes time.
Slide 146
146 Why Happiness Matters for Economics Preference for
Happiness: People value happiness, as evidenced by the fact that
they will sacrifice other things for the sake of happiness. News
and Happiness: Short-run spikes and dips in happiness signal what
people consider good and bad news, which in turn signals what they
care about.
Slide 147
147 Implications for Policy Happiness is valuable: should be
fostered. Happiness data are a reminder of tangible and intangible
externalities in the utility functionespecially social rank
externalities. Economic growth is of enormous value, despite the
Easterlin Paradox. Happiness data is not enough to diagnose
optimization mistakes.
Slide 148
148 Conclusion: Integrating Happiness into Mainstream Economics
Happiness needs to be integrated in a way that respects the canons
of Economics. Two key dimensions for integrating happiness into
economics: First, the short-run responses of happiness to news
provide important information about preferences. Second, long-run
happiness is important in its own right.
Slide 149
149
Slide 150
150 The Trend in Utility: Choose between 1955 and 2005 The
electronics revolution and the Internet have vastly expanded access
to a rapidly growing quantity of culture and science. Crime,
teenage pregnancy and drug abuse worsened at first but now trend
downward. Greater equality between races and sexes. War on Terror
better than Cold War. Better medical care and greater
longevity.
Slide 151
151 Life Expectancy
Slide 152
152 Would you want to go back to the way things used to be? No
computers or electronics No Ben and Jerrys No Harry Potter No
Beatles music yet released Jim Crow, strong male dominance Cold War
Few modern drugs
Slide 153
153 Elation and Loss Aversion There is evidence that happiness
rises less with good news than it falls with bad news. Assume also
that the duration of the effect of bad news on happiness is at
least as long. The greater effect of bad news, combined with a
preference for happiness, implies loss-aversion, a key aspect of
Prospect Theory. Thus, loss aversion (=first-order risk aversion)
can arise from rational preferences over ones own emotions. Here,
the agent needs to understand happiness.
Slide 154
154 Applying Price Theory to Elation For given nonlinearity in
happiness as a function of news, people should exhibit more
first-order risk aversion if they 1.care more about happiness and
2.believe that their happiness will be affected a lot, for a
long-time by events
Slide 155
155 Anticipation Effects Empirically, seasonals should capture
most of the anticipation effects that are not idiosyncratic.
Theoretically, anticipation effects can arise from a multiple-agent
model of the psyche, where some agents have high utility discount
rates. Different information sets? Model happiness for multiple
agents in the same way as for a unified self. Even when an agent is
not in charge, it cares about events. Happiness reporting: agent in
charge, frequency weighted average.
Slide 156
156 Can Manipulating Ones Perceptions Raise Utility? With
elation in the utility function, manipulating ones perception of
lifetime utility innovations becomes an issue. Lowering
expectations is mostly a wash because it lowers happiness now in
order to raise happiness later. It may also interfere with
optimization. The greatest potential gain from manipulating ones
perceptions is to lower ones memory of past expectations. (Attitude
of gratitude)
Slide 157
157 Manipulating Perceptions of Locus of Control Elation may
respond more to news about whether ones choices worked out than to
news about things beyond ones control. This would make it possible
to manipulate elation by labeling good events as due to ones
efforts, while bad events were beyond ones control.
Slide 158
158
Slide 159
159 Hedonic Adaptation is Not the Same Thing as Habit Formation
Hedonic adaptation is a statement about happiness, as measured by
psychologists. Habit formation is a statement about utility, as
measured by economists. If happiness were equal to flow utility,
data on hedonic adaptation would imply very strong habit
formation.
Slide 160
160 Evidence on Habit Formation Constantinides Form: 1. Joseph
Lupton estimates .75 based on portfolio choices 2. Impulse
responses for consumption choices suggest close to zero unless the
lags in the habit H are very long. 3. Because of the speed of
hedonic adaptation, long lags are inconsistent with U=Affect.
Slide 161
161 Modeling Choice: Habit Formation or Just Hedonic
Adaptation? 1. Equivalent to 2. Lets keep the economic theory
simple and put the complexity in the utility-happiness
relationship. a. Its clearer and simpler. b. It avoids the
misleading impression that there is anything wrong with the more
traditional functional form. Suppose and and happiness=first
difference of flow utility.
Slide 162
162 Does Habit Formation Affect the Choice between 1955 and
2005? To include the effects of habit formation on the decision,
imagine you had to give your newborn, whom you care a lot about, up
for adoption. Which world you would want your newborn to grow up
in? (cf. John Rawls) Beware of nostalgia. Remember the problems
that have now been partly or wholly resolved. Hold relative social
rank constant. Think about relative mortality rates.
Slide 163
163 (Long-Run) Happiness and Health Like health, happiness can
be measured independently is only one argument of the flow utility
function depends on different things than flow utility does (or on
the same things with different weights) has a complex household
production function
Slide 164
164 UtilityHappiness Summary of the Argument a.If only
innovations in lifetime utility mattered for happiness, maximizing
happiness and maximizing lifetime utility would be equivalent.
b.Focusing on only changes leaves out Rawlsian preferences. c.Any
predictable effect of choice variables on happiness implies
innovations in lifetime utility are not the only component of
happiness. d.People who knowingly, thoughtfully and without regret
choose not to maximize long-run happiness indicate that
utilityhappiness for them.
Slide 165
165 The Standard View in Psychology Currently, the standard
view among psychologists and most economists working with happiness
dataarticulated most forcefully by Daniel Kahnemanis that a present
discounted value of measured happiness is a good indicator of what
people should be maximizing. To the extent that people are
maximizing something else, it is viewed as a mistake. Factual
mistakes people make in predicting their own future happiness are
thought to be an important reason people make these optimization
mistakes. (Return to this below.)
Slide 166
166 Our View We are questioning this orthodoxy. When
well-informed and thoughtful, we view peoples choices as the best
indication of their individual welfare. People do often make
optimization errors. But much of what this orthodoxy takes as
evidence of optimization errors, we take as evidence that utility
and happiness are not the same thing.
Slide 167
167 Relationship to the Orthodoxy of Other Happiness
Researchers People value happiness (and will sacrifice other goods
for it) versus People should be maximizing happiness (economists
often interpret this as saying that happiness is the true utility
function).
Slide 168
168 Factual Mistakes about Happiness Need Not Cause Decision
Mistakes Given rational expectations, adding a linear combination
of lifetime utility innovations to the utility function has no
effect on the preferences represented. In this case, mistakes about
the rate of hedonic adaptation cause no harm to utility
maximization. However, mistakes about the controllable determinants
of baseline mood will cause material harm.
Slide 169
169 Factual Mistakes about Happiness Need Not Cause Decision
Mistakes Given rational expectations, adding a linear combination
of lifetime utility innovations to the utility function has no
effect on the preferences represented. In this case, mistakes about
the rate of hedonic adaptation cause no harm to utility
maximization. However, mistakes about the controllable determinants
of baseline mood will cause material harm.
Slide 170
170 Can Happiness Data Alone Diagnose Optimization Mistakes?
No. Happiness data alone cannot diagnose a mistake without strong
assumptions about the relationship between utility and happiness.
Even the relevance of mistakes in predicting future happiness
depends on the relationship between happiness and utility. In
Section 8 C, we illustrate how people could make mistakes in the
impulse response pattern of future happiness without impairing
optimization at all.
Slide 171
171 Applying Price Theory to Baseline Mood: The Demand for
Prozac If you learn more about the household production function
for happiness, your behavior will change in a direction that takes
advantage of that to raise happiness. Example: Demand for Prozac
will go up if information arrives that it is more effective in
raising happiness than previously thought (with no new information
about side effects). Demand will go down if information arrives
that it is less effective at raising happiness than previously
thought.
Slide 172
172 The Validity of Self-Reported Happiness Correlated with
observer ratings of happiness structured coding of facial
expressions electrical measures of face muscle activation voice
tone skin conductance, heart rate, blood pressure, etc. writing
speed judgment of probabilities word association and word
completion startle reflex left pre-frontal cortex activity (which
can also be induced by seeing pictures of a smiling baby and
reduced by seeing pictures of a deformed baby)