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Well-Being and Utility in

Psychology and EconomicsMiles Kimball (Project Leader),

Robert Barsky, Kerwin Charles, FredConrad, Randolph Nesse, Norbert

Schwarz, Dan Silverman, Robert Willis


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Specific Aims

1. Developing the theory of the relationshipbetween 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-basedmeasures of social rivalry in variousdomains.


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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

andon whether the additional economicresources will, in fact, be used to obtain

additional happiness.


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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 well-

being increasingly important for welfare

compared to further improvements inother areas.


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Significance

3. Economists are increasingly usingsubjective well-being data to addresseconomic and public policy issues that

involve non-marketed goods orinconsistent preferences. Identifying theimplications of subjective well-being datafor economic issues requires attention to

the details of the mapping betweensubjective well being data and standardeconomic concepts.


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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 tobe 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 andfamily relationships, sense of purpose, and

quality of leisure time pursuits.)


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Significance

5. In the coming decades, advances in

subjective well-being at work have the

potential to alter peoples relationship to

work in a way that significantly raise the

average retirement age, with important

implications for Social Security budget

balance.


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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 ofthis paradox is essential for effective integration

of subjective well-being data into Economics.


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Significance

7. Some of the leading candidates forexplaining the Hedonic Treadmill involvecomparison to expectations, the past, the

experience of others, or to goals, as a keyelement in the determination of subjectivewell-being. The economic and policyimplications of subjective well-being data

depend on the relative importance ofthese different comparisons in thedetermination of subjective well-being.


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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 comparisonwill 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 thanfor leisure, people will work too much

compared to the overall community optimum.


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Previous Psychological Studies

1. Judging overall life-satisfaction orhappiness in life is a complex cognitivetask. Evidence on the sensitivity of

subjective well-being data to contextindicates that respondents use shortcutsinvolving readily accessible informationsuch as

How happy the respondent feels right now

How happy the respondent thinks he or sheshouldfeel, given objective circumstances.


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2. Experience data on subjective well-being asks howhappy a respondent feels at the moment he or she issignaled. The objective is increase accuracy byfocusing explicitly on information that should be

immediately accessible to the respondent. Inunpublished work, Kahneman and Schwartz find thatexperience data shows an even more severe version ofthe Hedonic Treadmill than typical subjective well-beingdata: experience data on subjective well-being

ultimately reverts to its previous level even morecompletely than other data on subjective well-being.


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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, andin the famous White Hall study, morbidity and

mortality.


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Previous Economic Studies

1. The Ordinalist, or revealed preferencerevolution in Economics developedtechniques for measuring individual

welfare based on choice data alone,independent of any direct measure ofwell-being that are now a staple ofeconomic research. These techniques

can be applied to tradeoffs andpreferences over seeminglyincommensurable values.


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2. The Ordinalist revolution also made it clear thatthe key philosophical issues in judging socialwelfare for purposes of public policy could not beavoided even if a perfect direct measure of

individual welfare existed. Most notably, there isno easy escape from the difficulties surroundinginterpersonal comparison. For example, shouldthose with more refined tastes who can distinguish

more minute differences in quality therefore beaccorded greater weight in social choice?


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3. Economic theory has drawn a distinctionbetween a number of different concepts thateach has some prima facie claim to the labellevel of happiness:

a. Felicity (flow utility);

b. The individuals overall objective function (oftenmodeled, for example, as the expected presentvalue of flow utility for the individual, plus a constant

times the overall objective function of children).c. The part of the individuals objective function that

abstracts from altruistic caring about others.


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4. Economic theory has studied thecharacteristics of expectations in greatdepth. A key result is that news--dynamic

revisions to rational expectations--will bezero-mean and unpredictable.

5. Since Gary Beckers pioneering work,much of the activity of a household outsideof paid work has been reconceived ashousehold production of goods.


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6. A growing economic literature has made use of subjectivewell-being data.

a. This literature lays out many provocative findings.

b. With a few exceptions, the focus of this literature has beenon 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 well-beingdata are (i) the desire to study the welfare implications ofnon-traded goods and (ii) the desire to study welfareimplications in contexts where choice behavior is potentially

inconsistent.d. Many economists are still skeptical of the use of subjectivewell-being data in economics.


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Methods: Theory

1. The key issue is the relationship

between the dynamic behavior of

subjective well-being and standard

economic concepts such as flow utilityand the overall objective function. The

strong tendency toward mean reversion

of subjective well-being is the key factthat needs to be integrated in any

adequate theory.


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Methods: Theory

2. Identifying subjective well-being with either flowutility or the overall objective function comesuncomfortably close to violating revealedpreference, since the advances in health care,

plus other economic and technologicalimprovements, and the accumulation of movies,music and books would be enough to cause mostpeople to distinctly prefer modern life to life 50

years agoyet average subjective well-being hasnot improved at all over that period.


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Methods: Theory

3. It is clear that subjective well-being responds

in an intuitive way to news about objective

circumstances. For example, subjective well-

being rises after experimental subjectsdiscover 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 objectivecircumstances, such as income and health, is

surprisingly weak.


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Methods: Theory

5. The theory we propose to test builds on the twoobservations by positing that a major component ofsubjective well-being which can be labeled elationdepends directly on news about objective life

circumstances that has arrived over the last fewmonths rather than on the level of circumstances:

elation = f(news about life circumstances)

news the expectation about the overall objectivefunction given current information the expectationabout the overall objective function a few months ago


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Methods: Theory

6. If expectations are rational, standardresults about rational expectations implythat elation will be strongly mean

reverting. Intuitively, news doesnt staynews for very long; thus the initial burstof elation dissipates once the full importof news is emotionally and cognitively

processed. (Negative elation inresponse to bad news is labeled dismay.Dismay dissipates similarly.)


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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.


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Methods: Theory

8. Interpretation.

a. This equation is close to being adecomposition of subjective well-being intopredictable and unpredictable components.

b. Baseline mood is the part of subjective wellbeing that depends directly on the level ofcertain aspects of objective circumstances.

c. Baseline mood is defined as that part of

subjective well-being that can in principle bepredicted well in advance to the extent that theaspects of objective circumstances that itdepends on can be predicted.


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Methods: Theory

9. We hypothesize that factors known to fairlydirectly affect brain chemistry are likely to beparticularly important determinants of baselinemood. Things in this category include

a. psychotropic drugs

b. sleep

c. exercise

d. nutritione. social rank


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Methods: Theory

10. How does affect depend on standard economic concepts?

a. Contrary to the implicit assumption in much of the literature, wehypothesize that affect (the current happiness version of SWB) isnotequal to either flow utility or to the overall objective function.

b. Elation is hypothesized to depend primarily on changes in theoverall objective function.

c. We hypothesize that baseline moodthe long-run part of affect--is not a global measure of welfare at all. It only reflects the levelof certain aspects of an individuals situation.

d. If these hypotheses are true, the surprising implication is that,properly understood, the high frequency movements in affect thatreflect the dynamics of elation are betterindicators of what ishappening to overall welfare than the permanent movements inaffect that reflect movements in baseline mood.


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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 epiphenomenonthat is, affectdepends on news about the overall objective function, but theoverall 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 ahousehold production function and can be handled in standardways.

c. A surprising theoretical result is that if elation enters flow utility inan additive linear way, choice behavior will be totally unaffected.

d. The key aspects of prospect theory can be generatedparsimoniously by a nonlinear dependence of flow utility on elation.


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Methods: Theory

12. What are the implications of the Elation Theory ofAffect for welfare economics?

a. If affect is an epiphenomenon, or only elation entersflow utility, in a linear way, the onlyconsequence of theelation 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 riskand news flows.

c. We conjecture that baseline mood does, in fact, enterinto flow utility. Moreover, we conjecture that baselinemood is a luxury good, which will become increasinglyimportant as per capita income rises over time.


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Methods: Theory

13. Possible extensions of the Elation Theory of Affect:

a. If expectations are not fully rational, elation may notalways be mean reverting. Also, it may then bepossible to manipulate elation in positive ways ifelation based on irrational expectations enters flow

utility.b. Positive elation may motivate the acquisition of

information about further opportunities, while negativeelation (dismay) may motivate the acquisition ofinformation on further dangers. Such directed

information acquisition could affect probabilityassessments in systematic ways.

c. [Curiosity and fatalism.]


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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, thedegree of knowledge about the production function for health ishighly variable across people.

b. It is likely that many people do not know the true productionfunction for baseline mood. In particular, lack of understanding ofthe dynamics of the elation mechanism could make it difficult forindividuals to parcel out the determinants of baseline mood.

c. If baseline mood enters flow utility as a luxury good that willbecome increasingly important over time, the discovery anddissemination of facts about the determinants of baseline mood

could have large positive welfare effects over the course of thecoming decades.


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Methods: Analyzing HRS Data

1. Although it does not have the standard happiness or lifesatisfaction questions as part of the core survey, the HRShas 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 relationshipsubjective well-being to health and income.

b. A variety of measures exist on HRS modules, includingthe standard measures, which can be immediatelycompared with the measure available on every wave tovalidate it.

c. The entire depression scale is also of considerableinterest. In particular, its trend can address the question ofwhether depression is increasing.


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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 samebasic kinds of questions can be addressed.

In addition, the HRS data presents a

number of other opportunities not providedby the panel of national cross-sections.


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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 tochanges.

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 thesensitivityof affect to shocks and the

persistence of the reaction of affect to a shock.


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5. An important methodological question iswhether asking respondents about changes inhappiness can add useful information beyondwhat is obtained by asking them about levels.

While the HRS does not allow a direct answer tothis question, questions asking respondentsabout both the level and the change in healthstatus make it possible to study the parallel

question of whether asking respondents aboutchanges in health status adds useful informationbeyond what is obtained by asking about levels.


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6. The HRS mailout collects a considerableamount of information about consumption andtime use. In addition, the HRS contains a varietyof data on sleep quantity and quality. Because

the HRS is a panel, it is possible not only tocorrelate this data with affect but also tocorrelate changes over two years in time use,sleep and consumption patterns with affect tocontrol for individual effects. Corrections for

recent events that might affect elation can bemade in order to focus on the effect ofconsumption and time use on baseline mood.


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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 theseeffects with the approach of retirement

and the actual retirement transition.


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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 ispossible to study these issues

systematically by the adaptation to

surveys of techniques developed byRandy Nesse.

Methods: New Measures of the


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Incidence of Extremely Difficult Life

Situations1. Because of the concavity of flow utility in both

traded and non-traded goods, low values of a

good can be particularly influential indetermining flow utility---and therefore may be

particularly influential in determining both elation

and baseline mood. This provides an

opportunity to economically capture a largeportion of the variance of the determinants of

subjective well-being.



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Situations2. 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 byRandy Nesse.



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Situations3. 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 otherprovides.

Methods: New Measures of Social


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Comparison, Envy and Positional

Concerns in Various Domains1. It is not easy, even in principle, to draw a clear

distinction between social comparison, envy

and positional concerns. In fact, it is possibleto establish a variety of observational

equivalence results among these three

phenomonena. Therefore, our strategy will be

to measure the aggregate of these threephenomena.



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Methods: New Measures of SocialComparison, Envy and Positional

Concern in Various Domains2. Very little data on social comparison,

envy and positional concerns in various

domains on nationally representativesamples currently exists. We will designand implement a survey instrumentmeasuring social comparison, envy andpositional concerns in various domains onthe Survey of Consumers.



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Concern in Various Domains3. We will use and compare two complementary

strategies for measuring social comparison,envy and positional concerns:

a. Asking about preferences over alternativeworlds with different average levels of a goodor bad and different levels of the good or badfor the respondent.

b. Using the known survey methodology effectof bracketing levels on responses to guage theextent of social comparison.



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Concern in Various Domains4. 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.



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Concern in Various Domains5. 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 andexpenditure 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.



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Concern in Various Domains6. By also including a measure of affect and the actual level of

the good or bad in the relevant domain on the Survey ofConsumers, we can test whether individual differences insocial comparison interact with actual levels of a good or bad

in determining affect. The panel structure of the SurveyConsumers makes it possible to use instrumental variabletechniques to focus on long-lasting effects on affect.Conversely, it is possible to isolate the effect of news bylooking at the effect of changes in the individual andpopulation average levels of a good or bad on affect and

separating out predictable from unpredictable changes.

M th d Hi h F


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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 (psychologicaladaptation) 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, whichhampers the study of exact speed and dynamics

of the psychological adaptation process.

M th d Hi h F


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Movements in Affect

2. Implementation of an affect measure onthe Survey of Consumers will permit theanalysis of responses to individual shocks

at a six month interval andresponses ofthe average American adult to nationalevents at a very high frequency sinceSurvey of Consumers is conducted

monthly and within the month will makeavailable to us the day and time of theinterviews.

M th d Hi h F


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Movements in Affect

3. Cooperation with the Osaka University

Institute for Social and Economic

Research Center of Excellence on the

parallel implementation of an affectmeasure on a monthly survey in Japan

may allow a cross-cultural study of the

details of psychological adaptation.

M th d I t di i li


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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 theHRS and behavioral economics.

M th d I t di i li


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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 thesubprojects discussed above.

M th d I t di i li


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Collaboration3. Although all subprojects arise out of this

interdisciplinary collaboration, the elation theory ofaffect and associated empirical techniques foranalyzing existing data comes primarily from aneconomic perspective, while the new measures ofgoals and goal attainment and extremely difficult lifeevents comes primarily from a psychologicalperspective. The two different measures of socialcomparison come from the two different perspectives,

while the interest in time use comes from a commonperspective. Thus, both psychological and economicperspectives are fully represented.

M th d I t di i li


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Collaboration

4. Working very closely in conducting thevarious subprojects within the context ofone overall project makes possible the

comparison of the virtues of the differentapproaches. In particular, it will foster adebate over the relative importance ofcomparison with expectations, the past, the

experience of others and personal goals inthe determination of subjective well-being.

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