1 More on Happiness Miles Kimball

2 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 Behavioral Economics, since loosening the constraints on the utility function raises the value of additional data.

3 Examples of Cognitive Economics Experimental Economics. Neuroeconomics. Survey measures of expectations. Survey measures of preference parameters based on hypothetical choices. Happiness research.

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 Distinguishing preferences and happiness as a matter of logic. Preferences (Represented by Lifetime Utility) = The extent to which people get what they want, where what they want is indicated by their choices. Happiness (Current Affect) = How positive people’s feelings are at a given time.

6 Evidence that Utility≠Happiness 1.People who knowingly, thoughtfully and without regret choose not to maximize long-run happiness indicate that utility≠happiness for them. 2.People make choices eagerly that they never regret, but which have no long-run effect on how happy they feel. –Moving to a new city –Buying a nice car 3. People thoughtfully make choices that they never regret, which lower their long-run felt happiness. –Commuting further to a higher-paying job. –Longer working hours to put one’s child through college. –Having a baby? –Doing one’s duty.

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8 The Easterlin Paradox

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10 What does it mean to say that lifetime utility has fallen permanently? Revealed Preference is the measure of lifetime utility. If there were a lever to magically undo the damage of Katrina, we would pull it. –True for the harm to others. –True for the harm to self, narrowly construed. –True even if the past cannot be changed but only the harm from now on reversed.

11 Sketch of Kimball-Willis 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 the output of a household production function (like health, entertainment, or nutrition.)

12 Elation and Hedonic Adaptation Because it is based on recent news, 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.

13 Why Happiness Matters for Economics Preference for Happiness: Other things being equal, people prefer to be happy. News and Happiness: Short-run spikes and dips in happiness –signal what people consider good and bad news, –which in turn signals what they prefer.

14 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.

15 Why are Utility and Happiness Confused? Because they are dramatic, elation and dismay may dominate people’s perception of happiness. Everyone wants good news. That is, everyone wants what spikes in happiness signal. Not everyone values the emotional spikes per se, as distinct from what they signal. Not everyone will sacrifice other goods for the long-run happiness that remains even when there is no good or bad news.

16 The Personal News Question

17 Personal News and Happiness (U.S.)

18 Personal News and Happiness (Japan)

19 Other Theoretical Issues Hedonic Adaptation vs. Habit Formation Anticipation Effects Can Manipulating Perceptions Raise Utility? The Evolutionary Psychology of Happiness

20 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.

21 Evidence on Habit Formation Constantinides Form: 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.

22 Modeling Choice: Habit Formation or Just Hedonic Adaptation? 1. Equivalent to 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 functional form. Suppose and and happiness=first difference of flow utility.

23 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.

24 Summary: Can an Exotic Utility Function make Utility=Happiness? a.If only innovations in lifetime utility mattered for happiness, maximizing happiness and maximizing lifetime utility would be equivalent. b.EXCEPT: 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.

25 Anticipation Effects Empirically, seasonals should capture most of the anticipation effects that are not idiosyncratic. Theoretically, anticipation effects can arise from a multiple-agent model of the psyche, where some agents have high utility discount rates. Different information sets? Model happiness for multiple agents in the same way as for a unified self. Even when an agent is not in charge, it cares about events. Happiness reporting: agent in charge, frequency weighted average.

26 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”)

27 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.

28 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.

29 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)

30 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.

31 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).

32 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.