Download Subjective Well-Being and Utility in Psychology and Economics

Well-Being and Utility in
Psychology and Economics
Miles Kimball (Project Leader),
Robert Barsky, Kerwin Charles, Fred
Conrad, Randolph Nesse, Norbert
Schwarz, Dan Silverman, Robert Willis
Specific Aims
1. Developing the theory of the relationship
between affect and utility.
2. Use HRS data to test the theory and to
study the dynamics of affect.
3. Develop new measures of well-being.
4. Design and implement affect-based,
choice-based and perception-based
measures of social rivalry in various
domains.
Significance
1. Even if economic progress continues
unabated over the next 50 years in the
U.S. advanced countries, whether the
citizens of these countries end up rich
and happy or rich and unhappy depends
on whether money can buy happiness
and on whether the additional economic
resources will, in fact, be used to obtain
additional happiness.
Significance
2. To the extent there is a tradeoff between
subjective well-being and other values,
the increases in income and wealth that
accompany economic progress are likely
to make improvements in subjective wellbeing increasingly important for welfare
compared to further improvements in
other areas.
Significance
3. Economists are increasingly using
subjective well-being data to address
economic and public policy issues that
involve non-marketed goods or
inconsistent preferences. Identifying the
implications of subjective well-being data
for economic issues requires attention to
the details of the mapping between
subjective well being data and standard
economic concepts.
Significance
4. Given an adequate understanding of the
mapping between subjective well-being data
and standard economic concepts, the use of
subjective well-being data has the potential to
be especially important in the economics of
aging, since many of the most important goods
for retired people are non-marketed goods.
(Consider, for example, health, marital and
family relationships, sense of purpose, and
quality of leisure time pursuits.)
Significance
5. In the coming decades, advances in
subjective well-being at work have the
potential to alter people’s relationship to
work in a way that significantly raise the
average retirement age, with important
implications for Social Security budget
balance.
Significance
6.The “Hedonic Treadmill,” “Easterlin Paradox” and
“Progress Paradox” all refer to the lack of
secular improvement in subjective well-being in
the face of major increases in per capita income,
improvements in health, and improvements in
many other social indicators. On its face, this
paradox seems to present a serious challenge
for Economics. A thorough-going resolution of
this paradox is essential for effective integration
of subjective well-being data into Economics.
Significance
7. Some of the leading candidates for
explaining the Hedonic Treadmill involve
comparison to expectations, the past, the
experience of others, or to goals, as a key
element in the determination of subjective
well-being. The economic and policy
implications of subjective well-being data
depend on the relative importance of these
different comparisons in the determination
of subjective well-being.
Significance
8. If the importance of social comparison, envy,
and positional concerns differs from one
domain to another, effort and expenditure in
domains with more intense social comparison
will be overemphasized relative to domains
with less intense social comparison from an
overall welfare point of view. For example, if
there is more social comparison for goods than
for leisure, people will work too much
compared to the overall community optimum.
Previous Psychological Studies
1. Judging overall life-satisfaction or
happiness in life is a complex cognitive
task. Evidence on the sensitivity of
subjective well-being data to context
indicates that respondents use shortcuts
involving readily accessible information
such as
– How happy the respondent feels right now
– How happy the respondent thinks he or she
should feel, given objective circumstances.
Previous Psychological Studies
2. Experience data on subjective well-being asks how
happy a respondent feels at the moment he or she is
signaled. The objective is increase accuracy by
focusing explicitly on information that should be
immediately accessible to the respondent. In
unpublished work, Kahneman and Schwartz find that
experience data shows an even more severe version of
the Hedonic Treadmill than typical subjective well-being
data: experience data on subjective well-being
ultimately reverts to its previous level even more
completely than other data on subjective well-being.
Previous Psychological Studies
3. There is substantial reversion over time of
subjective well-being toward its previous level
even for non-traded goods such as health,
marriage and divorce, and interstate migration.
Thus, the dynamics of subjective well-being
cannot be safely ignored in any domain.
4. Social rank has been found to affect many
outcomes, such as subjective well-being, and
in the famous White Hall study, morbidity and
mortality.
Previous Economic Studies
1. The Ordinalist, or “revealed preference”
revolution in Economics developed
techniques for measuring individual
welfare based on choice data alone,
independent of any direct measure of
well-being that are now a staple of
economic research. These techniques
can be applied to tradeoffs and
preferences over seemingly
incommensurable values.
Previous Economic Studies
2. The Ordinalist revolution also made it clear that
the key philosophical issues in judging social
welfare for purposes of public policy could not
be avoided even if a perfect direct measure of
individual welfare existed. Most notably, there
is no easy escape from the difficulties
surrounding interpersonal comparison. For
example, should those with more refined
tastes who can distinguish more minute
differences in quality therefore be accorded
greater weight in social choice?
Previous Economic Studies
3. Economic theory has drawn a distinction
between a number of different concepts that
each has some prima facie claim to the label
“level of happiness”:
a. Felicity (flow utility);
b. The individual’s overall objective function (often
modeled, for example, as the expected present
value of flow utility for the individual, plus a constant
times the overall objective function of children).
c. The part of the individual’s objective function that
abstracts from altruistic caring about others.
Previous Economic Studies
4. Economic theory has studied the
characteristics of expectations in great
depth. A key result is that news--dynamic
revisions to rational expectations--will be
zero-mean and unpredictable.
5. Since Gary Becker’s pioneering work,
much of the activity of a household outside
of paid work has been reconceived as
household production of goods.
Previous Economic Studies
6. A growing economic literature has made use of
subjective well-being data.
a. This literature lays out many provocative findings.
b. With a few exceptions, the focus of this literature has
been on the cross-sectional and trend properties of
subjective well-being rather than on its detailed dynamic
properties.
c. Two key motivations for the use of subjective wellbeing data are (i) the desire to study the welfare
implications of non-traded goods and (ii) the desire to
study welfare implications in contexts where choice
behavior is potentially inconsistent.
d. Many economists are still skeptical of the use of
subjective well-being data in economics.
Methods: Theory
1. The key issue is the relationship between
the dynamic behavior of subjective wellbeing and standard economic concepts
such as flow utility and the overall
objective function. The strong tendency
toward mean reversion of subjective
well-being is the key fact that needs to
be integrated in any adequate theory.
Methods: Theory
2. Identifying subjective well-being with either flow
utility or the overall objective function comes
uncomfortably close to violating revealed
preference, since the advances in health care,
plus other economic and technological
improvements, and the accumulation of
movies, music and books would be enough to
cause most people to distinctly prefer modern
life to life 50 years ago—yet average
subjective well-being has not improved at all
over that period.
Methods: Theory
3. It is clear that subjective well-being responds
in an intuitive way to news about objective
circumstances. For example, subjective wellbeing rises after experimental subjects
discover a dime and falls after experimental
subjects are given negative test results.
4. But the relationship of subjective well-being to
levels of variables describing objective
circumstances, such as income and health, is
surprisingly weak.
Methods: Theory
5.
The theory we propose to test builds on the two
observations by positing that a major component of
subjective well-being which can be labeled elation
depends directly on news about objective life
circumstances that has arrived over the last few
months rather than on the level of circumstances:
elation = f(news about life circumstances)
news ≈ the expectation about the overall objective
function given current information – the expectation
about the overall objective function a few months ago
Methods: Theory
6. If expectations are rational, standard
results about rational expectations imply
that elation will be strongly mean
reverting. Intuitively, news doesn’t stay
news for very long; thus the initial burst
of elation dissipates once the full import
of news is emotionally and cognitively
processed. (Negative elation in
response to bad news is labeled dismay.
Dismay dissipates similarly.)
Methods: Theory
7. Although the definition of elation is motivated
by the hypothesis that the reaction to recent
news will be a major component of subjective
well-being, the theory does not assume this.
Instead, we posit that affect, a current
happiness version of subjective well-being, is
given by
affect = baseline mood + elation.
Methods: Theory
8. Interpretation.
a. This equation is close to being a
decomposition of subjective well-being into
predictable and unpredictable components.
b. Baseline mood is the part of subjective well
being that depends directly on the level of
certain aspects of objective circumstances.
c. Baseline mood is defined as that part of
subjective well-being that can in principle be
predicted well in advance to the extent that the
aspects of objective circumstances that it
depends on can be predicted.
Methods: Theory
9. We hypothesize that factors known to fairly
directly affect brain chemistry are likely to be
particularly important determinants of baseline
mood. Things in this category include
a. psychotropic drugs
b. sleep
c. exercise
d. nutrition
e. social rank
Methods: Theory
10. How does affect depend on standard economic concepts?
a. Contrary to the implicit assumption in much of the literature, we
hypothesize that affect (the current happiness version of SWB) is
not equal to either flow utility or to the overall objective function.
b. Elation is hypothesized to depend primarily on changes in the
overall objective function.
c. We hypothesize that baseline mood—the long-run part of affect-is not a global measure of welfare at all. It only reflects the level
of certain aspects of an individual’s situation.
d. If these hypotheses are true, the surprising implication is that,
properly understood, the high frequency movements in affect that
reflect the dynamics of elation are better indicators of what is
happening to overall welfare than the permanent movements in
affect that reflect movements in baseline mood.
Methods: Theory
11. How does flow utility (and therefore the overall objective function)
depend on the components of affect?
a. One possibility is that affect is an epiphenomenon—that is, affect
depends on news about the overall objective function, but the overall
objective function does not depend on affect.
b. To the extent that, instead, flow utility depends on baseline mood,
baseline mood simply acts like one more good generated by a
household production function and can be handled in standard
ways.
c. A surprising theoretical result is that if elation enters flow utility in
an additive linear way, choice behavior will be totally unaffected.
d. The key aspects of prospect theory can be generated
parsimoniously by a nonlinear dependence of flow utility on elation.
Methods: Theory
12. What are the implications of the Elation Theory of
Affect for welfare economics?
a. If affect is an epiphenomenon, or only elation enters
flow utility, in a linear way, the only consequence of the
elation theory of affect for welfare economics is adding
a useful new source of data.
b. If elation enters flow utility non-linearly, there are
non-trivial consequences for the welfare effects of risk
and news flows.
c. We conjecture that baseline mood does, in fact, enter
into flow utility. Moreover, we conjecture that baseline
mood is a luxury good, which will become increasingly
important as per capita income rises over time.
Methods: Theory
13. Possible extensions of the Elation Theory of Affect:
a. If expectations are not fully rational, elation may not
always be mean reverting. Also, it may then be
possible to manipulate elation in positive ways if
elation based on irrational expectations enters flow
utility.
b. Positive elation may motivate the acquisition of
information about further opportunities, while negative
elation (dismay) may motivate the acquisition of
information on further dangers. Such directed
information acquisition could affect probability
assessments in systematic ways.
c. [Curiosity and fatalism.]
Methods: Theory
14. Extensions to the theory of baseline mood.
a. Individuals do not necessarily fully understand the production
function for goods they produce themselves. For example, the
degree of knowledge about the production function for health is
highly variable across people.
b. It is likely that many people do not know the true production
function for baseline mood. In particular, lack of understanding of
the dynamics of the elation mechanism could make it difficult for
individuals to parcel out the determinants of baseline mood.
c. If baseline mood enters flow utility as a luxury good that will
become increasingly important over time, the discovery and
dissemination of facts about the determinants of baseline mood
could have large positive welfare effects over the course of the
coming decades.
Methods: Analyzing HRS Data
1.
Although it does not have the standard happiness or
life satisfaction questions as part of the core survey,
the HRS has a variety of measures for assessing
subjective well-being:
a. A subscale of the depression scale has been used
successfully by Peter Ubel to study the relationship
subjective well-being to health and income.
b. A variety of measures exist on HRS modules,
including the standard measures, which can be
immediately compared with the measure available on
every wave to validate it.
c. The entire depression scale is also of considerable
interest. In particular, its trend can address the
question of whether depression is increasing.
Methods: Analyzing HRS Data
2.The same basic principles for separately
identifying baseline mood and elation
apply to HRS individual panel data as to
the panel of national cross-sections. The
same basic kinds of questions can be
addressed. In addition, the HRS data
presents a number of other opportunities
not provided by the panel of national
cross-sections.
Methods: Analyzing HRS Data
3. The HRS has detailed data on wealth, marital
and health shocks, as well as choice behaviors
such as retirement that can be used to analyze
the impulse response functions of affect to
changes.
4. In the individual panel of the HRS, it is possible
to analyze the determinants of individual effects
not only on the level of affect, but also on the
sensitivity of affect to shocks and the
persistence of the reaction of affect to a shock.
Methods: Analyzing HRS Data
5. An important methodological question is
whether asking respondents about changes in
happiness can add useful information beyond
what is obtained by asking them about levels.
While the HRS does not allow a direct answer to
this question, questions asking respondents
about both the level and the change in health
status make it possible to study the parallel
question of whether asking respondents about
changes in health status adds useful information
beyond what is obtained by asking about levels.
Methods: Analyzing HRS Data
6. The HRS mailout collects a considerable
amount of information about consumption and
time use. In addition, the HRS contains a variety
of data on sleep quantity and quality. Because
the HRS is a panel, it is possible not only to
correlate this data with affect but also to
correlate changes over two years in time use,
sleep and consumption patterns with affect to
control for individual effects. Corrections for
recent events that might affect elation can be
made in order to focus on the effect of
consumption and time use on baseline mood.
Methods: Analyzing HRS Data
7. The HRS has detailed information on job
characteristics. This makes it possible to
study the effect of job characteristics on
baseline mood and the interaction of these
effects with the approach of retirement and
the actual retirement transition.
Methods: New Measures of Goals,
Goal Attainment
1. The determination of affect may be a
nonlinear function of life situation in
relation to goals rather than a simple
function of life situation alone. It is
possible to study these issues
systematically by the adaptation to
surveys of techniques developed by
Randy Nesse.
Methods: New Measures of the
Incidence of Extremely Difficult Life
Situations
1. Because of the concavity of flow utility in both
traded and non-traded goods, low values of a
good can be particularly influential in
determining flow utility---and therefore may be
particularly influential in determining both elation
and baseline mood. This provides an
opportunity to economically capture a large
portion of the variance of the determinants of
subjective well-being.
Methods: New Measures of the
Incidence of Extremely Difficult Life
Situations
2. The incidence and timing of extremely
difficult life situations can be measured on
surveys such as the HRS by adaptation to
surveys of the methods for assessing the
incidence of extremely difficult life
situations that have been developed by
Randy Nesse.
Methods: New Measures of the
Incidence of Extremely Difficult Life
Situations
3. The measure of goals and goal
attainment can be compared to the
incidence of extremely difficult life
situations to gauge the relative power of
the two approaches and whether each has
incremental power beyond what the other
provides.
Methods: New Measures of Social
Comparison, Envy and Positional
Concerns in Various Domains
1. It is not easy, even in principle, to draw a clear
distinction between social comparison, envy
and positional concerns. In fact, it is possible
to establish a variety of observational
equivalence results among these three
phenomonena. Therefore, our strategy will be
to measure the aggregate of these three
phenomena.
Methods: New Measures of Social
Comparison, Envy and Positional
Concern in Various Domains
2. Very little data on social comparison,
envy and positional concerns in various
domains on nationally representative
samples currently exists. We will design
and implement a survey instrument
measuring social comparison, envy and
positional concerns in various domains on
the Survey of Consumers.
Methods: New Measures of Social
Comparison, Envy and Positional
Concern in Various Domains
3. We will use and compare two complementary
strategies for measuring social comparison,
envy and positional concerns:
a. Asking about preferences over alternative
worlds with different average levels of a good
or bad and different levels of the good or bad
for the respondent.
b. Using the known survey methodology effect
of bracketing levels on responses to guage the
extent of social comparison.
Methods: New Measures of Social
Comparison, Envy and Positional
Concern in Various Domains
4. These measures will be implemented in a
variety of domains:
a. house size and quality
b. commuting time
c. work hours
d. income
e. etc.
Methods: New Measures of Social
Comparison, Envy and Positional
Concern in Various Domains
5. Having data on the importance of social
comparison, envy and positional concerns in
various domains makes it possible to see if
there are differences in the importance of
social comparison across domains that could
tilt effort and expenditure toward certain
domains at the expense of others in a way that
is individually optimal given what everyone
else is doing, but is social suboptimal.
Methods: New Measures of Social
Comparison, Envy and Positional
Concern in Various Domains
6.
By also including a measure of affect and the actual
level of the good or bad in the relevant domain on the
Survey of Consumers, we can test whether individual
differences in social comparison interact with actual
levels of a good or bad in determining affect. The
panel structure of the Survey Consumers makes it
possible to use instrumental variable techniques to
focus on long-lasting effects on affect. Conversely, it is
possible to isolate the effect of news by looking at the
effect of changes in the individual and population
average levels of a good or bad on affect and
separating out predictable from unpredictable
changes.
Methods: High Frequency
Movements in Affect
1. Evidence from psychological experiments
suggests that that after all but the most serious
shocks to circumstances, the regression of affect
toward its previous value (“psychological
adaptation”) takes a matter of months, or
sometimes much less. Existing large-scale
surveys typically provide subjective well-being
data at most at an annual frequency, which
hampers the study of exact speed and dynamics
of the psychological adaptation process.
Methods: High Frequency
Movements in Affect
2. Implementation of an affect measure on
the Survey of Consumers will permit the
analysis of responses to individual shocks
at a six month interval and responses of
the average American adult to national
events at a very high frequency since
Survey of Consumers is conducted
monthly and within the month will make
available to us the day and time of the
interviews.
Methods: High Frequency
Movements in Affect
3. Cooperation with the Osaka University
Institute for Social and Economic
Research Center of Excellence on the
parallel implementation of an affect
measure on a monthly survey in Japan
may allow a cross-cultural study of the
details of psychological adaptation.
Methods: Interdisciplinary
Collaboration
1. The team for this project includes
a. psychologists expert on subjective
well-being measures, depression and
survey methodology and
b. economists expert on utility functions,
intra-household decision-making, the use
of subjective well-being measures on the
HRS and behavioral economics.
Methods: Interdisciplinary
Collaboration
2. Because of the nature of the topics, this
range of expertise in psychology and
economics is and inputs from both
disciplines are essential for each of the
subprojects discussed above.
Methods: Interdisciplinary
Collaboration
3. Although all subprojects arise out of this
interdisciplinary collaboration, the elation theory of
affect and associated empirical techniques for
analyzing existing data comes primarily from an
economic perspective, while the new measures of
goals and goal attainment and extremely difficult life
events comes primarily from a psychological
perspective. The two different measures of social
comparison come from the two different perspectives,
while the interest in time use comes from a common
perspective. Thus, both psychological and economic
perspectives are fully represented.
Methods: Interdisciplinary
Collaboration
4. Working very closely in conducting the
various subprojects within the context of
one overall project makes possible the
comparison of the virtues of the different
approaches. In particular, it will foster a
debate over the relative importance of
comparison with expectations, the past,
the experience of others and personal
goals in the determination of subjective
well-being.