Economics of happiness
what are some examples of how surveys have collected life evaluation measures
(World Values Survey) - Taken all together, how happy would you say you are: very happy, quite happy, not very happy, not at all happy?" life satisfaction - On the whole are you very satisfied, fairly satisfied, not very satisfied, or not at all satisfied with the life you lead?" (Eurobarometer) Cantril ladder gallup world poll. - "Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?"
what are the two main concepts of the Easterlin Paradox ..
1. Individual level analysis- A. in a point in time, people who are richer are happier by using the cross section analysis of a GSS survey B. Apply cross section analysis to LS of 1941 birth cohorts as income increases over 28 years .. Conclusion: prediction didnt hold, when a person's income and LS is tracked over a time period, the relationship is flat 2. Country level analysis - A. Use cross section relationship between 14 countries in the 1960's. B. Apply cross section to a poor country that experienced unprecedented growth between 1962-1987 Conclusion: prediction doesn't hold, Japan had increase in GDP but LS was still flat. the positive relationship between national income and life satisfaction found at a point in time across countries does not hold in time series
give two reasons of why we care about other factors that affect utility
1. policy making 2. analysis of well being and growth In economics we study how to allocate scarce resources for unlimited needs - pursuing maximum utility. In order to achieve max utility we must first understand the different components that play a part in the utility function for life satisfaction. We have found there there are many factors that play a role in life satisfaction apart from income including: personality, time, socio-demorgraphic and personal characteristics
describe the Easterlin paradox and why it is a paradox
At a point in time happiness varies directly with income both among and within nations, but over time happiness does not trend upward as income continues to grow while at a point in time income and happiness have a direct correlation, looking at the same data over a period of time there is no direct correlation between income and happiness. Instead the happiness is flat remains flat even while income increases over time.
how do you respond to critique of cultural biases
Comparability across nations - people are consistent with how they answer LS variables across countries, LS changes responds in same ways in countries that are going through similar conditions : transition countries Alternative(objective) measures of well being - equally affected by national measurement issues Globally, LS can be described by economic well being, social support, and life expectancy. (GDP, social networks) Other factors affecting LS Freedom to make life choices, generosity, absence of corruption LS differences btw top and bottom 10 countries can be explained by the personal and public domains High consistency in how people rate their lives in different countries
what is difference between domain analysis and micro- econometric analysiss
Domain analysis : LS = fn(Econ sat, job sat, health sat, fam sat) Domain analysis uses domain satisfaction as explanatory variables micro econometric analysis uses objective life circumstances Microeconometric analysis : LS = fn(income, married, divorced, widowed, education, employment status ...) they are just different approaches to analyzing a similar question, which is, what determines well-being as captured by life satisfaction.
What data did Easterlin use to create his paradox ? How was newer data affected this paradox ?
Easterlin used cross section in a GSS survey: applied cross section to track PEOPLE born 1941-1950 as their income increased over 28 years. average income increased from 12,000 to 27,000 Predicted: LS should move from 2.17 to 2.27 Did same thing across countries. tracked 14 countries in the 1960s. tracked poorer countries that experienced unprecedented GDP growth between the 60s-80s. Prediction: since GDP rose from 22% to 77% LS should follow from 6.5 to 7.7 Conclusion: prediction was wrong, LS was flat as income increased New data bolsters Easterlin paradox
In countries across the world, the three main aspects of LS include:
Economic well-being (GDP per capita) Social Support Healthy Life expectancy
what is the relationship between national income and LS in time series ?
It is not the same as cross sectional. when a country's income and LS are followed over a period of time, increasing income does not lead to increasing LS
Time series data provides ... what is the relationship between income and LS ...
LS and income at different points of times It is flat... positive relationship found in cross sectional is not held in time series
Cross sectional data provides ...
LS and income levels for different subjects at same point in time Within a country - do richer people have higher LS than poorer people ? Across countries - do countries with higher GDP have higher aggregate LS than countries with lower?
how do you argue the criticisms of subject well being measures
LS is a reliable measure of well being, methodological issues can be fixed by survey design 1. reliability - adequately stable for the same individuals over time sensitive to changing life circumstances similar for different individuals under the same circumstances 2. validity - people who report to be happy, display pro social behavior LS measures reflect other well being measures including income and health Biases are random and typically do not affect aggregate measures Distortions can be fixed by surveys if they ask right questions
what does set point say about influence in life circumstances of happiness ?
LS is set at a baseline level not related to life circumstances. Different socio-demographic approach to LS Says differences in well-being are attributed to changing objective life circumstances, rather than constant individual personality traits
which concepts explain the change in "transition countries"? and what is the final level of happiness
Loss aversion explains the drop in GDP therefore a decline in LS at the beginning. As GDP increases people hedonically adapt their LS. There is a downward jump in well-being due to a loss and a 1 unit increase in log-income is accompanied by 0.05-SD increase in LS while a 1 unit decrease in log-income accompanied by 0.10-SD decrease in LS as income increases, hedonic adaptation allows LS to stay stable while during the losses people weren't able to adapt. LS may not exceed the level of LS at which the transition had taken place because of hedonic adaptation.
main aspects captured by LS
Material standard of living (income, consumption) Health (physical and mental) Family and companionship (social support) Job or work situation (occupation, labor market conditions
what is loss aversion.. what is endowment affect...
a loss in income is considerably more noticeable than an increase of income at the same amount. losses loom larger than gains downward "sticky" aspirations - people adapt to an increase of income so LS is constant, but when income falls people don't adapt so LS falls helps explain short term relationship in income and LS
how would you design the world happiness survey ?
avoid any bias question at beginning, ask happiness question first keep ordering the same dont ask double negative questions stay consistent on high to low and low to high questions, keep it one way all the time
what are some objective well being measures and what are their advantages and disadvantages
cardinal measures - GNP GDP advantages: based on economic theory, has set guidelines for what makes you happy. marginal utilities etc. Social indicators: life expectancy, education level, human development index disadvantages: dont know what is more important. some people value some things more than others.
why are objective measures of well being weak
decision utility may not equal experienced utility. cant predict future tastes, things change altruistic behaviors cant be explained by objective measures relative well being can be better than objective well being
what is social comparison
determine self worth based on what others around you have explains long term Easterlin bc as everyone starts to earn more, LS stays the same over time if you increase income of one individual it may lead to higher LS but if you increase everyones with the same amount LS is the same.
what is domain analysis in explaining global life satisfaction?
domain analysis is used to study the extent to which global well-being can be seen as the net outcome of reported satisfaction with life circumstances. life domains are groups of circumstances representing specific aspects of life
what are the implications of the set point model for evolution of happiness over time?
events can move people above and below baseline but will always return to this stable point
what is the main determinant of utility in economics?
income
which component of the Easterlin paradox can be explained with hedonic adaptation concept ?
increase in income has temporary effects: either cause we adapt or because our expectations for LS rise.
is the view of income being the main utility a complete or incomplete view ?
it is incomplete because over the short term income affects LS but over the long term it has no association
what does a "transition" mean in term "transition country"
it means that the country went through a transition from communism to capitalism
what are life domains and what are some examples ?
life domains are groups of circumstances representing specific aspects of life Economic domain: material conditions such as income or ownership of goods. Family domain: marital status, number/age of children, etc. Health domain: physical and mental health. Work: type of work, unemployment, job characteristics, etc.
which concept better describes the actual change of LS during a recession, social comparison or loss aversion
loss aversion better describes the actual change in LS because it doesn't really change for social comparison but does for loss aversion. LS never achieves how high it was before the decrease in LS.
what is an example that demonstrates aspirations for people over time?
lottery winners are no happier before and after winning and job satisfaction appears to be more related to changes in workers conditions not their seniority/income levels
life goals over the life cycle... material and non material what does it suggest?
material - change in life goals leads to adaptation, so you want more and more but LS stays the same non material - pursuit of some non material goals increase LS which could prove that set point theory is wrong marriage - constant life goals imply a lack of adaptation which could explain the relationship between marital status and LS, after they get married there is nothing that will make you happier suggests that the "set-point" may not be set but could change in response to changing life circumstances in non-material life domains
difference between objective and subject well being ?
objective well being is measured in ordinal or cardinal measures. there is a definite measure that qualifies your well being ex. gdp, gnp. subjective well being relies more on honesty and self awareness. ex. body language, social level, pulse rates etc.
how is loss aversion and hedonic adaptation similar?
people adapt hedonically to an increase in income but not to a decrease in income(loss aversion) both have to do with explaining the short term declines
ways that subjective measures can be collected and which is the most effective
physiological and biological factors - pulse rate social behaviors - friendliness and activity level non verbal behaviors- smiling good posture surveys- most effective and commonly used
what is set point theory? what are positive and negative traits ?
proposes that personality is the main determinant of LS, implying that LS should be constant at baseline level positive: extraversion, self esteem, optimism, perceived control negative: neuroticism
what are the differences between set-point theory and micro econometric analysis ?
set point proposes that personality is the main determinant of LS, implying LS should be constant at that level "analysis of life" or micro econometric analysis- analysis of life circumstances such as marital life, status, health, and work situation have a strong association with LS
which component of the Easterlin Paradox can be explained with loss aversion?
short term fluctuations between income and LS can be explained happiness varies with changes at a point in time, as income increases people adapt and LS stays the same, but decrease in income people don't adapt and LS falls
difference between the short term and long term association between LS and income
short term: when income falls aspirations remain high, leading to a decline in LS, if income recovers then aspirations recover as well long term: in long-term, as income increases so do aspirations(bc hedonic adaptation) which leads to no change in LS
which component of the Easterlin paradox can be explained with the social comparison concept?
social comparison can explain why over a extended period of time, people have stable LS levels because as everyone starts to have higher incomes, social comparison kicks into play and you don't have more than your peers.
what and who are studies that approve and disprove set point?
support- 1. Costa et al 1987: Found that there was no main effect of time on total well-being (TWB), evidence for the stability of levels of well-being in adulthood 2. Diener et al 1999: Personality traits exhibit some of the strongest relations with SWB, genes may be partly responsible for these relations against - Costa et al: Health Concern was higher and Positive Affect lower among older age groups, but there were also a cross-sectional decline with age in Negative Affect Rietveld et al: Find that only 5-10% of single-question subjective well-being measures (such as LS) can be explained by a person's genetic predispositions
what is hedonic adaptation
tendency where humans return to a relatively stable level of happiness despite recent spikes helps explain that at a point in time, higher income can lead to higher LS, but over time, person's LS does not increase with an increase to income
Hagerty and Veenhoven concluded.... is there any concern for their findings?
that contemporaneous correlation positive in 14 out of 21 countries. lagged correlations show little or no implications of casualty between income and LS, there fore, increasing national income does go with increasing national happiness yes there are methodological concerns
what is micro econometric analysis ?
the relationship between LS and life circumstances is studied through micro econometric analysis uses regression to compare z(circumstances and personality traits), LS, and income
Cross sectional comparisons- within a country ... across other countries ...
within a country - at a point in time, people with higher incomes within a given country reported higher levels of LS, but may not hold at higher levels of income Same relationship holds when socio-demographic and socio-economic variables are introduced At a point in time, people in richer countries have higher LS.
