Cognitive Economics
• Definition: Taking seriously data other than
actual choices in the wild.
• Must be linked back to actual choices in the wild.
• Analogous to Cognitive Psychology
vs. B.F. Skinner.
• Complementary to Psychological Economics,
since loosening the constraints on the utility
function raises the value of additional data.
1
Examples of Cognitive Economics
•
•
•
•
Experimental Economics.
Neuroeconomics.
Survey measures of expectations.
Survey measures of preference
parameters based on hypothetical
choices.
• Happiness research.
2
Utility and Happiness
Miles Kimball and Robert Willis
University of Michigan
http://www-personal.umich.edu/~mkimball/pdf/index.html
3
A Growing Economic Literature
Uses Happiness Data
• Provocative findings—see Layard’s Happiness
• Mostly focuses on the cross-section and the
long-run trend.
• Motivations of the researchers:
– to study the welfare implications of non-traded goods
– to diagnose optimization mistakes and study welfare
implications in contexts where choice behavior is
potentially inconsistent.
• Many other economists are skeptical: the
theoretical status of happiness is unclear.
4
“Happiness,” as Defined
Operationally by Psychologists
• On a scale from one to
seven, where one is
“extremely unhappy” and
seven is “extremely happy,”
how do you feel right now?
5
What is “Happiness” in Relation to
Economic Theory?
a. Flow utility?
b. The individual’s overall objective
function?
c. The part of the individual’s objective
function that abstracts from the desire
to do one’s duty?
d. The individual’s objective function plus
pleasure from memory?
e. None of the above.
6
What “happiness”
(subjective well-being) is NOT
• NOT utility.
• NOT happiness in Aristotle’s sense
(recommended preferences).
• But, we argue, this kind of data carries
useful information.
7
Outline of Introduction
A. Distinguishing utility and happiness as a
matter of logic.
B. Why we care about utility and happiness.
C. Why the relationship between them can’t
be simple (short version).
D. Our take on the relationship between
utility and happiness.
8
A. “Utility” and “Happiness”
• Lifetime Utility = The extent to which
people get what they want, where
what they want is indicated by their
choices.
• Happiness (Current Affect) = How
positive people’s feelings are at a
given time.
9
B. Judging Individual Welfare
• People’s own choices and
feelings are the two nonpaternalistic indicators we have
for individual welfare (what makes
an individual better off in the
sense relevant for policy).
• A priori, both seem useful.
10
C. The Easterlin Paradox
and Hedonic Adaptation
Taking both feelings and choices seriously runs
into the difficulty that affect and utility seem to
behave quite differently.
• Easterlin Paradox: Measured utility trends
strongly upwards, while measured happiness
has little trend.
• Hedonic Adaptation: Utility is affected
permanently by permanent changes in external
circumstances, but the effects on happiness
seem shorter-lived.
11
D. The Relationship Between
Happiness and Utility is Unresolved
Existing work in Economics largely either
A.
B.
ignores happiness data, e.g.:
“Happiness is irrelevant to Economics”
OR
assumes happiness=flow utility:
“Happiness is a sufficient statistic for
utility.”
12
The Middle Way
In this paper, we steer a middle course
between these two extremes:
• Happiness ≠ Flow Utility,
BUT
• Happiness has a systematic
relationship to utility.
13
The Question: What is the
Relationship?
• Both felt happiness and choice-based
utility are well-defined, observable
concepts. It is easy to resolve many
seeming paradoxes when one recognizes
that these are two different things.
• The nature of the relationship between the
standard psychological concept of
happiness (affect) and the standard
economic concept of lifetime utility is an
open empirical question.
14
Significance
Establishing any systematic relationship
between affect and utility would
1. provide an important bridge between
psychology and economics.
2. allow psychological data and theory to be
used in economics in a way that is
complementary to standard economic
data and theory.
3. allow all the tools of economics to be
brought to bear toward understanding
15
happiness.
Empirical Facts Motivating
our Theory of Happiness
•Easterlin Paradox
•Hedonic Adaptation
16
The Easterlin Paradox
17
Hedonic Adaptation
(Mean Reversion of Affect)
Cross-sectional evidence of hedonic adaptation for
• incarceration
• loss of the use of limbs
• serious burns
• death of a spouse
• winning the lottery
– winning £10,000 raises affect by six times as much in
the first year as £10,000 per year in additional
income.
Dynamics of national happiness after big news:
• “Unhappiness after Hurricane Katrina”
18
Sketch of our Integrated Theory of
Utility and 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 is
a subutility function (like health,
entertainment, or nutrition.)
19
Why Happiness Matters for
Economics (Our View)
•
•
First, short-run happiness in response to
news can give important information
about preferences.
Second, long-run happiness is important
for economic welfare in the same way as
other composite goods such as health,
entertainment, or nutrition.
20
The Core of the Paper
3. Measuring Happiness
4. Measuring Utility
5. Utility ≠ Happiness: Evidence
6. An Integrated Theory of Utility
and Happiness
21
Bonus Features
7. Why Utility and Happiness are
Often Confused
8. Elation in the Utility Function
9. Implications for Happiness
Empirics
10. Implications for Policy
22
6. Integrated Theory of Utility and Happiness
happiness= baseline mood + elation.
A. Elation
B. Baseline Mood
C. Formal Model
D. Expectations and Happiness
E-G. Evolutionary Significance
-Elation
-Hedonic Adaptation
-Baseline Mood
H. Implications of the Integrated Theory
23
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.
24
‘Elation’ and ‘Dismay’
• ‘elation’ = the component of
happiness due to recent
news about lifetime utility.
• ‘dismay’ = -elation
25
Elation and Hedonic Adaptation
•
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.
– The initial burst of elation dissipates once
the full import of news is emotionally and
cognitively processed.
– Relevance to the Hedonic Treadmill, a.k.a.
the Easterlin Paradox.
26
‘Baseline Mood’
• baseline mood = M(Kt, Xt)
• Xt = vector of control variables: time use,
spending pattern, portfolio choice, etc.
• Kt = vector of
– state variables encoding every aspect of the past that
matters for utility: wealth, weight, habits, level of
fatigue, one’s spouse being alive, etc.
– variables exogenous to the individual: weather, state
of macroeconomy, consumption patterns of others in
society, etc.
CONTINUED ON NEXT SLIDE →
27
Baseline Mood and Flow Utility
• flow utility = U(Kt, Xt, M(Kt, Xt))
• We think of baseline mood M(Kt, Xt) as the
component of happiness produced by a
household production function.
• A good analogy is to health. Like health,
baseline mood
– can be measured independently of Kt and Xt
– is only one argument of the flow utility function
– depends on different things than flow utility does
on the same things with different weights)
– has a complex household production function
(or
28
What does Baseline Mood
Depend on?
•
•
Any persistent aspect of happiness is part of
baseline mood. Genes are the biggest factor.
Also, there is some evidence that each of the
following has a persistent effect on happiness:
a. Prozac
b. sleep
c. exercise
d. good eating habits
e. social rank
+ pleasantness of one’s current activity
29
Do People Know the Production
Function for Baseline Mood?
•
•
•
•
Just as people don’t 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.
30
Applying Price Theory to
Baseline Mood
• Materialism lowers happiness (weak, but
interesting evidence).
• Tradeoff between happiness and other
goods.
• Materialism means higher preferences for
other goods compared to happiness.
31
Applying Price Theory to
Baseline Mood
• Is baseline mood a luxury good?
• Even normality of baseline mood leads to a
version of the Easterlin Paradox:
Why don’t people buy higher baseline mood as
part of their expanding consumption bundle?
• Three potential answers:
– Some uptrending negative externalities may be
particularly bad for baseline mood.
– Lack of knowledge of baseline mood production fn.
– The relative price of baseline mood may be trending
up. (A large effect if the elasticity of substitution
between baseline mood and other goods is high.)
32
Formal Model of Utility and Happiness
T t
vt  Et   jU ( Kt  j , X t  j , M ( Kt  j , X t  j ))
j 0
vt = lifetime utility
U =flow utility
M =baseline mood
Et = rational expectation as of time t
β = impatience
Kt = state vector: wealth, weight, fatigue,
being alive, spouse being alive, genes,
weather, prices, tax rates, pollution
average level of consumption in society…
Xt = control vector: consumption, time use … 33
The Innovation in Lifetime Utility
and Elation
t  vt  Et 1vt
et  f (t ,t 1 ,t 2 ,...)
Note about the
lifetime utility
innovation:
t  vt   1 [vt 1  U ( K t , X t , M ( K t , X t ))]
34
Theory of Happiness
(Current Affect)
At  M ( Kt , X t )  e(t ,t 1 ,t 2 ,...).
35
Preference for Happiness Axiom:
Informal Version
• 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.
36
Preference for Happiness Axiom
Suppose that before the arrival of some
information, an agent is indifferent between two
decision rules A and B. If information arrives
that has no effect on the feasible set of choices
of K and X, but which raises the probability
distribution of happiness under rule A and lowers
that under B according to first-order stochastic
dominance in every future date and state of
nature, then the agent will strictly prefer rule A.
37
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.
38
Relationship to the Orthodoxy of
Other Happiness Researchers
• People value happiness (and will sacrifice
other goods for it)
versus
• People should be maximizing happiness
(which we and other economists who
subscribe to it interpret as saying that
happiness is the true utility function).
39
Preference for Happiness:
Discussion
• Preference for Happiness has
important implications, but is a
cautious assumption.
• Cautious assumptions have the
advantage of being more likely to gain
broad acceptance within Economics.
40
The Happiness and News Axioms
a. Happiness is a function of the
history of K, X and lifetime utility.
Fixing the realized history of K and X,
b. Happier if current expected lifetime
utility is of a preferred future.
c. Less happy if past expected lifetime
utility was of a preferred future.
41
Happiness Function Implied by
Happiness and News Axioms +
Standard Additively Separable
Expected Utility
At  H t ( Kt , X t ,t ,t 1 ,t 2 ,...).
42
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) 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.
43
Neurobiological Evidence that
Expectations Matter for Affect
• “These studies measured the firing of
dopamine neurons in the animal’s ventral
striatum, which is known to play a powerful
role in motivation and action.
• In their paradigm, a tone was sounded,
and two seconds later a juice reward was
squirted into the monkey’s mouth.
• Initially, the neurons did not fire until the
juice was delivered.
44
Neurobiological Evidence that
Expectations Matter for Affect
• Once the animal learned that the tone
forecasted the arrival of juice two seconds later,
however, the same neurons fired at the sound of
the tone, but did not fire when the juice reward
arrived.
• These neurons were not responding to reward,
or its absence … they were responding to
deviations from expectations.
• When the juice was expected from the tone, but
was not delivered, the neurons fired at a very
low rate, as if expressing disappointment.” (p.26)
45
The Evolutionary Psychology of
Elation and Dismay
• Functionally, elation and dismay may motivate cognitive
processing—much 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
• Economic implications of this functional role of elation:
such directed information acquisition could affect
probability assessments in systematic ways.
46
The Evolutionary Psychology of
Hedonic Adaptation
• “Adaptive processes serve two important functions.
First, they protect organisms by reducing the internal
impact of external stimuli…. Second, they enhance
perception by heightening the signal value of changes
from the baseline level….”
• “Hedonic adaptation may serve similar protective and
perception-enhancing functions…. persistent strong
hedonic states (for example, fear or stress) can have
destructive physiological concomitants … Thus, hedonic
adaptation may help to protect us from these effects.”
• “Hedonic adaptation may also increase our sensitivity to,
and motivation to make, local changes in our objective
circumstances….” (Frederick and Loewenstein)
• See also Rayo and Becker (2005).
47
Speculations on The Evolutionary
Psychology of Baseline Mood
• High social rank may make it safe to look
more for opportunities than for dangers, so
that it makes sense to stimulate the same
machinery that is turned on by the receipt
of good news.
• Frequency dependence in the value of
being an optimist or pessimist.
• Quirks in the system?
• Stephen Pinker’s view of cheesecake.
48
Three Implications of this
Theory of Happiness
• Happiness ≠ Utility.
• Disputes the idea that temporary
movements in affect are unimportant:
a temporary movement in affect can signal
important utility-relevant news related to
the long-term welfare of the individual.
• Baseline mood is not a summary measure
of utility, but it is something people care
about.
49
Bonus Features
7. Why Utility and Happiness are
Often Confused
8. Elation in the Utility Function
9. Implications for Happiness
Empirics
10. Implications for Policy
50
7. Why Utility and Happiness
are Often Confused
• If baseline mood is exogenous to the
individual, and elation is linear in lifetime
utility innovations, maximizing any positive
linear combination of current and expected
future happiness is equivalent to
maximizing lifetime utility.
 T t j
 T t j
Et   At  j     Et M t  j b0,t (vt  Et 1vt ) 
 j 0
 j 0
1
b
j  n
 .
j ,t t  j
51
Why are Utility and Happiness
Confused? (continued)
• Elation and dismay may dominate
people’s perception of happiness, but
without much conscious awareness of the
resetting of the implicit reference point that
depends on past expectations of lifetime
utility.
• The reference point is a sunk cost that
does not affect maximization, so lack of
awareness of it is not a problem.
52
8. Elation in the Utility Function
So far,
a. flow utility = U(Kt, Xt, M(Kt, Xt))
What if
b. flow utility = U(Kt, Xt, M(Kt, Xt))
+b0ιt+b1ιt-1+b2ιt-2+…
c. or flow utility
= U(Kt, Xt, M(Kt, Xt),e(ιt,ιt-1,ιt-2,…)) )
53
Elation in the Utility Function Might
Not Change a Thing
• 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 material
harm to utility maximization.
54
Can Manipulating One’s
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
one’s perceptions is to lower one’s memory of
past expectations. (“Attitude of gratitude”)
55
Manipulating Perceptions of
Locus of Control
•
•
Elation may respond more to news about
whether one’s choices worked out than
to news about things beyond one’s
control.
This would make it possible to
manipulate elation by labeling good
events as due to one’s efforts, while bad
events were beyond one’s control.
56
Elation and Prospect Theory
• In the nonlinear case, elation theory yields
prospect theory very naturally. In particular, if
a. Elation is roughly proportional to the rate of cognitive
processing of news.
b. Bad news requires more processing than good news.
c. Within bad or good news, the total amount of
processing needed is proportional or less than
proportional to the magnitude of the news.
• Thus, Prospect Theory can arise from rational
preferences over one’s own emotions.
57
9. Implications for Happiness
Empirics
• The time series properties of happiness
matter.
• Price Theory can be used to study
baseline mood (e.g., value of happiness).
• The Elation Theory is readily testable.
• Elation provides information about
preferences and expectations.
– Like event studies in Finance
– Need high frequency data on affect.
58
10. Implications for Policy
• Happiness is valuable: should be fostered.
• Happiness data are a reminder of tangible
and intangible externalities in the utility
function—especially social rank
externalities.
• Economic growth is of enormous value,
despite the Easterlin Paradox.
• Happiness data is not enough to diagnose
optimization mistakes.
59
Reprise: Integrated Theory of
Utility and Happiness
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
a subutility function (like health,
entertainment, or nutrition.)
60
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.
61
3. Psychologists Reliably Measure
Happiness, But What Is It?
• Some economists think happiness
can’t be measured well. This is just
not true. Current happiness (affect) is
one of the easiest of all subjective
concepts to measure.
• What is true (that these economists
are intuiting) is that once happiness is
measured, we don’t know what it
means in terms of economic theory.
62
Measuring Current Happiness (‘Affect’).
“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?)”
63
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)
64
Other Measures of Subjective WellBeing: Life Satisfaction
On a scale from 1 to 10, how satisfied
are you with your life?
65
World Values Survey Global
Happiness Question
"Taking all things together, would you say
you are
1. Very happy
2. Quite happy
3. Not very happy
4. Not at all happy
9. Don’t Know [Do NOT READ OUT]”
66
Problems with these Alternative
Measures of Subjective Well-Being
•
•
Judging overall life-satisfaction or overall
happiness in life is a complex cognitive task.
Evidence on the sensitivity of 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.
67
Advantages of Affect Measures
(Current Happiness Measures)
•
By contrast, affect measures depend on much
more accessible information:
– How R feels right now.
– How R felt the past week.
•
•
Very little judgment is required.
How R feels right now affects the overall lifesatisfaction or global happiness questions
anyway. It is clearer to focus on that current
happiness component directly. Then we know
what we are getting.
68
4. Measuring Utility: Revealed
Preference Over Choices
•
•
The Ordinalist, or “revealed preference”
revolution in Economics developed
techniques for measuring individual
welfare based on choice data alone.
This clearly defines utility as a distinct
concept from happiness.
– Utility is the extent to which people get what
they want.
– Happiness is how people feel.
69
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.
70
Life Expectancy
71
Would you want to go back to the
way things used to be?
– No computers or electronics
– No Ben and Jerry’s
– No Harry Potter
– No Beatles music yet released
– Jim Crow, strong male dominance
– Cold War
– Few modern drugs
72
Revealed Preference:
Migration Flows
• Per capita GDP in Mexico is not far from
what it was in the U.S. in the 1950’s.
• 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.
73
Do People Know Their Own Utility
Functions?
• Not perfectly. For example, I don’t know if I will
like a new flavor of ice cream.
• Lack of knowledge of one’s own utility function
can be modeled as an internal informational
constraint. (Rayo-Becker is an example.)
• The key distinguishing features of mistakes
about one’s own utility function are
– regret
– changing one’s mind after learning more.
74
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.
75
The Standard View in Psychology
• Currently, the standard view among
psychologists and most economists working with
happiness data—articulated most forcefully by
Daniel Kahneman—is 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.
76
Our View
• We are questioning this orthodoxy.
• When well-informed and thoughtful, we
view people’s 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.
77
5. Happiness ≠ Flow Utility:
Evidence
•
•
•
Assuming that current happiness is equal to
flow utility immediately has many strong
implications.
In particular, a large amount of data on
happiness exists, with many characteristics
that do not match usual ideas about utility.
Measured happiness
1. has no strong trend.
2. is strongly mean-reverting.
78
The Easterlin Paradox
79
Hedonic Adaptation
(Mean Reversion of Affect)
Cross-sectional evidence of hedonic adaptation for
• incarceration
• loss of the use of limbs
• serious burns
• death of a spouse
• winning the lottery
– winning £10,000 raises affect by six times as much in
the first year as £10,000 per year in additional
income.
Dynamics of national happiness after big news:
• “Unhappiness after Hurricane Katrina”
80
Experience Data Show Even
Stronger Hedonic Adaptation
•
•
Data on felt happiness from experience
sampling reverts to its previous level even
more completely than life satisfaction and
global happiness assessments (Kahneman
and Schwarz, unpublished work). Why?
Life satisfaction and global happiness
assessments incorporate
–
–
an element of autobiography
people’s ideas about how they “should” feel
81
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.
82
Evidence on Habit Formation

Constantinides Form:
vt  Et   jU (Ct  j   H t  j )
j 0
1. Joseph Lupton estimates θ≈.75 based on
portfolio choices
2. Impulse responses for consumption
choices suggest θ 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.
83
Modeling Choice: Habit Formation
or Just Hedonic Adaptation?
happinesst  f (Ct )  f (Ct 1 )
Suppose

and
vt  Et   j [ f (Ct  j )  f (Ct  j 1 )].
j 0
1. Equivalent to

vt  Et   j f (Ct  j )
j 0
and happiness=first difference of flow utility.
2. Let’s keep the economic theory simple and put
the complexity in the utility-happiness relationship.
a. It’s clearer and simpler.
b. It avoids the misleading impression that there
is anything wrong with the more traditional 84
functional form.
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.
85
Other Evidence that
Utility≠Happiness
1. People make choices eagerly that they never
regret, but which have no long-run effect on
their affect.
–
–
Moving to a new city
Buying a nice car
2. With some misgivings at the tradeoff, people
thoughtfully make choices that they never
regret, which lower their affect.
–
–
–
Commuting further to a higher-paying job.
Longer working hours to put one’s child through
college.
Having a baby?
86
Utility≠Happiness
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 utility≠happiness for
them.
87