Project 2: Well-Being and Utility in Economics (April 1, 2009) Project Leader: Miles Kimball Co-Investigators: Daniel Benjamin, Dan Silverman, Robert Willis

Intro As people spend a larger fraction of their lives in retirement and in the empty-nest phase, it is important to consider all the dimensions that go into making a full life when work and child- rearing are not the center of daily life. This raises two key scientific issues. –appropriately valuing non-market goods. –how people make tradeoffs over time and –tradeoffs between finances and happiness.

Existing Grant Under the existing grant, we developed a theory of the relationship between happiness and utility emphasizing (a) the dynamic response of happiness to news and (b) tradeoffs people make between happiness and other goods. We confirmed that (a) the theory of the dynamics of happiness is promising.

Renewal Grant We will employ the implications of this theory of the dynamics of happiness to –Generate valuations of non-market goods distinct from other methods of valuing non- market goods. (Distinct in particular from those using the level of happiness.) –Generate a measure of the marginal value of wealth distinct from other measures of the marginal value of wealth.

Renewal Grant (cont.) We will investigate the potential of (b) our theory that people make tradeoffs between happiness and other goods.

Aim 1: Data Collection Collect high frequency data on the dynamics of happiness in response to – naturally occurring financial and non- financial shocks in the Surveys of Consumers and a daily web panel –and to experimental financial shocks in the lab, in a daily web panel and on the ALP

Aim 1: Data Collection (cont.) Collect survey data on –people’s willingness to sacrifice happiness for other goods and sacrifice other goods for happiness. –people’s beliefs about the production function for happiness.

Aim 2: Happiness Dynamics After Naturally Occurring Shocks Use the dynamics of happiness documented after financial shocks in the HRS and the Surveys of Consumers to establish a conversion rate between size of financial shock and size of impulse response for happiness. Compare the impulse responses of financial and non-financial shocks to generate a new type of valuation of non-market goods.

Aim 3: Study Happiness Dynamics and Related Phenomena Experimentally Look at the quantitative effects of news about modest monetary prizes on the impulse response of happiness expectations about large public and private events (in collaboration with Project 1). Explore the implications of these impulse responses of happiness for –the marginal value of wealth and –loss aversion

Aim 4: …Experimentally (cont.) 3 stages –Lab –Daily Web Panel –ALP

Aim 4: Investigate the Potential of Applying Price Theory to Happiness. Use new survey data to investigate –beliefs about the production function for happiness and –people’s willingness to trade off happiness with money. Look for evidence in HRS data of tradeoffs between happiness and other goods.

Key Equations

Testing the idea that baseline mood is time intensive Try to identify shocks that make people –worse off, but happier in the long run OR –better off, but less happy in the long run Candidates in the HRS –forced retirement that makes people happier in the long run? –aged parent getting worse and going from home care by respondent to nursing home –promotion that generates a time crunch

Connections with other projects Project 1: Experiments to test whether experimentally induced happiness generates optimism. Project 3: Happiness theory as a foundation for loss aversion (e.g. disappointment aversion). Project 5: Happiness theory as a possible reason for for departures from expected utility theory. Cornell panel.

New Fact: Financial Crisis and Happiness

1. Elation Theory and Empirics Advance our theoretical and empirical understanding of the dynamic response of happiness to utility-relevant news—using both new data from naturally-occurring situations and new experimental data— with the aim of developing and testing a metric for the direction and magnitude of utility-relevant news based on the dynamics of happiness.

1.1 Loss Aversion from the Interaction of Elation Theory and Preference for Happiness Symmetry gives zero wealth effect on relative risk preferences, despite “fear of emotional roller coaster” loss aversion. Benartzi and Thaler (1995), Gabaix and Laibson (2002), and Parker and Julliard (2001) Tie to Project 3

1.2 Elation Theory and Internal Conflict Defensive Anticipation effects Connection with Gruber and Mullanaithan General connection with behavioral concerns

1.3 Hedonic Adaptation: Fast for Small Shocks, Slow for Big? Shows we can connect the dots. Laying theoretical groundwork for a later proposal.

1.4.1 Survey of Consumers Happiness Data National News Events Division by Political Party Affiliation Stock Market Effects

1.4.2 Election Surveys Known time with big news Allows tests of elation theory’s predictions: bigger revisions in expectations and stronger preferences lead to bigger movements in happiness. Can test whether bad news has a bigger effect on elation than good.

1.4.3 Daily Web Survey on the ALP More representative than Japanese Undergraduates Correlation with other data on the ALP. ???

1.5 Experimental Identification of the Elation Function Measure happiness before and after giving money. Vary amount of money Look at different lags Announce money depending on a later coin toss to identify the effects of good and bad news.

2. Effects of Happiness on Expectations Identify the effects of experimentally induced variations in happiness on expectations relevant for consumption, saving, portfolio choice and retirement- timing decisions.

Measure expectations after the unexpected money Surveys of Consumers expectations HRS expectations Other expectations from Project 1 Look at revision of expectations from information a la Adeline Delavande

3. Determinants of Long Run Happiness Analyze the determinants of long-run happiness using the HRS psychosocial leave-behind and geographical data.

Contents of the Psychosocial Leave Behind hobbies, vacations, attendance at religious services and clubs, 5-question measure of life-satisfaction, frequency of feeling blue, 7-question measures of the quality of relationships with spouse, children, other relatives and friends

Contents of Psychosocial Leave Behind (cont.) frequency of contact with children, other relatives and friends, 5 questions on how much one can trust people, 10 questions on general hopefulness vs. hopelessness about one’s own life, 13 questions on internal vs. external perceived locus of control, 3 questions on loneliness,

Contents of Psychosocial Leave Behind (cont.) sense of belonging to one’s local area and vandalism, trustworthiness of people, danger after dark, friendliness, cleanliness, helpfulness and deserted buildings in one’s local area, 18 question sequence on specific feelings, 4 questions on religious belief plus a question on frequency of private prayer,

Contents of Psychosocial Leave Behind (cont.) perceived fairness of spouse, family and work relationships, reaction to 26 words describing personality, measures of conscientiousness, goal directedness, sense of purpose, openness to new experiences, self- esteem, and belief that one is improving

Contents of Psychosocial Leave Behind (cont.) 2 measures of emotional sensitivity, feeling blue, satisfaction with financial situation, an inventory of common problems and how upsetting they are, questions on anxiety, 11 questions on having a bad temper, 12 questions assessing feelings about work-life balance,

Contents of Psychosocial Leave Behind (cont.) a measure of social status picturing a ladder and asking the respondent to choose the rung he or she is on. (+Δ) 6 questions on being treated badly at work in an interpersonal sense, 15 questions on various aspects of one’s job, including outward benefits and security, the nature of the job itself, workload, and feelings about one’s job.

4. Comparing Methods for Valuing Non-market Goods Compare different methods of valuing non-market goods. In particular, compare (a)the approach of valuing non-market goods by looking at the dynamics of happiness to (b)the approach of looking at the level of happiness, and compare both of these to (c)a hypothetical-revealed-preference approach and—in the case of non-market goods associated with living in different communities— (d)an approach based on actual migration patterns.

4.1 Using the Level of Happiness Regress happiness on nonmarket goods and income. Divide nonmarket good coefficient by income coefficient. We question this measure.

4.2 Using the Dynamics of Happiness Event studies: Widowing events differ in their financial consequences Divide “lost area under the curve” from the direct effects of spouse’s death by the “lost area under the curve” per reduction in ln(lifetime wealth)

4.3 Using Vignettes to Measure Hypothetical Revealed Preference Aspects of lives –Variables like those in psychosocial leave- behind –Geographical area characteristics –Genetic happiness or unhappiness No huge claims

4.4 Using Actual Geographical Sorting and Migration Based on David Albouy’s previous research Allows comparison of the valuation of city characteristics by several methods.

5. Happiness Literacy & Price Theory Applied to Happiness Develop measures of happiness literacy and strength of preference for happiness in order to test key predictions of the Price Theory of Happiness: in particular, that those who (a) value happiness highly, (b) know something about the production function for long-run happiness, and (c) have a low opportunity cost of time, will have higher levels of happiness.

Designing a Happiness Literacy Survey Instrument Key Variables –Happiness Literacy –Preference for Happiness –Price of Time –Happiness Outcomes Pilot Survey

6. Measuring the Marginal Value of Wealth Test the implications of the Elation Theory of Happiness for measuring the marginal utility of wealth by comparing the magnitude and duration of happiness dynamics after experimentally induced wealth shocks in the American Life Panel to information on the American Life Panel about life-cycle consumption, saving and labor supply choices, as well as indicators of the presence of liquidity constraints.

Elation Theory and the Marginal Value of Wealth Marginal value of wealth central to life- cycle models of consumption, labor supply, retirement, altruism, etc. In common models MVW = MUC By definition, marginal value of wealth=innovation to lifetime utility from an unexpected $1 Elation theory: short-run dynamics of happiness can gauge these innovations

A. Specific Aims (cont.) 4. Examine the relationship between happiness literacy, degree of preference for happiness, time budget and happiness. 5. Test the implications of the elation theory for measuring marginal utility.

B. Background and Significance 1.Valuing Non-Market Goods 2.Dealing with the Possibility of Mistakes 3.The Claims of the Existing Economic Literature on Happiness a. Long-run happiness regressions can value non-market goods?? b. Happiness data can diagnose mistakes?? 4. Price Theory of Happiness 5. Marginal Utility in Empirical Economics

C. Preliminary Studies 1.Elation Theory of Utility and Happiness 2.Empirics of Elation Determination a.Financial and Non-Financial Dimensions of Major Life Events in the HRS b.Katrina c.Elections d.Daily Web Panel of News and Happiness 3.Happiness and Expectations

C1. Elation Theory of Utility and Happiness a. Happiness≠Utility 1.Utility = U(Happiness, Other Goods) 2.Maximizing Happiness is Not the Object b. Happiness Dynamics and Innovations to Lifetime Utility 1. Happiness = Baseline Mood(Genes, Time Use, Goods) + Elation(Recent News About Lifetime Utility) 2. Hypothesis: Size of Innovation to Lifetime Utility is Proportional to the Extra Area or Lost Area Under a Graph of Happiness Versus Time. 3. Intensity and Duration of Effects on Happiness

C1b4: Model of the Short-Run Dynamics of Happiness Happiness it = α i + β i f(ΔV i,t) + ε it α i = Individual Fixed Effect β i = Emotional Sensitivity Parameter t = Time Lapse Since Shock V i = H(W) + J(Z); W=Wealth; Z=Non-Mkt Wealth Shock: ΔV i = H(W 0 +ΔW) - H(W 0 ) Non-Market Shock: ΔV i = J(Z 0 +ΔZ) – J(Z 0 )

C2a. Empirics of Elation: Major Life Events in the HRS 1.Variation in both the financial and non- financial dimensions of dated shocks: widowing, divorce, health events 2.Imputing a value based on the dynamics of happiness in reaction to the financial and non-financial dimensions of shocks 3.Exponential: no evidence within HRS that duration depends on size of shock

Parametric Estimates, By Life Insurance Status Parameter With Life Insurance Point estimate (s.e.) Without Life Insurance Point estimate (s.e.) c (1.21) (2.05) (1.61) (2.68) (3.72) (6.19) (5.26) (12.62) (0.045) (0.076)

C2b. Empirics of Elation: Katrina 1.Important national news events can have a significant effect on average happiness in the U.S. 2.Even for Hurricane Katrina—a quite big event—this effect was short-lived, lasting only a few weeks. 3.The dip in the average happiness in the U.S. after Katrina may provide non- market evidence of altruism.

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C2c. Empirics of Elation: Elections 1.Partisan movements in happiness near elections reflect heterogeneity in preferences over non-market goods. 2.Happiness reaction depends on both intensity of political preferences and expectations. (2006 elections) 3.Potential for validation of happiness movements as a strength of preferences measure.

C2d. Empirics of Elation: Daily Web Panel 1.Subjective ratings of both personal and national news (-5 to +5 scale of bad news to good news) are tightly related to subsequent happiness dynamics. 2.News on a given day affects happiness for about two weeks. 3.Personal news has a bigger effect on happiness than national news. 4.Proportional: duration is indep. of size

C3. Happiness and Expectations a.Both the individual fixed effect component of happiness and variations in happiness are related to expectations reports b.Interesting variations in which types of expectations measures are affected most c.Weather can be used as an instrument to see if variations in happiness can cause shifts in expectations d.Are these shifts in expectations shifts that affect behavior? Sunny days and stock mkt.

D. Research Design and Methods 1.Continue to develop and validate the technique of using the short-run dynamics of happiness to gauge the size of shocks to lifetime utility. 2.Analyze the determinants of long-run happiness using the HRS psychosocial leave-behind. 3.Compare different methods for valuing non-market goods.

D. Research Design and Methods (cont.) 4. Examine the relationship between happiness literacy, degree of preference for happiness, time budget and happiness. 5. Test the implications of the elation theory for measuring marginal utility.

D1. Developing and Validating Techniques for Using Elation to Measure Utility Shocks a.Continue SCA data collection b.Daily Web Panel on the ALP in collaboration with Osaka University c.Experiments dosing people with money –Vary amount, probabilities and time lapse –Establish functional form of happiness dynamics in relation to monetary values probabilities and time. –Feeds into design of MU elicitation

D2. Analyze determinants of long-run happiness with HRS psychosocial leave-behind. a.HRS Psychosocial Leave-Behind has rich data on hobbies; religious attendance, belief and prayer; quality of relationships with spouses, children, relatives, and friends; loneliness; positive and negative thinking; quality of local community, locus of control; perceived discrimination; past traumas; management of emotions; rank on social ladder; addictions; …

D2. Analyze determinants of long-run happiness with HRS psychosocial leave-behind. a.… anxiety; job quality; date of being robbed, death of child, natural disaster, assault, life-threatening illness or accident, physical abuse. b.Extra data on happiness. c.Preference for happiness makes the production function for long-run happiness matter. d.Feeds into subprojects D3 and D4.

D3. Compare different methods for valuing non- market goods. a.Elation-based measures on HRS b.Ratios of happiness regression coefficients as in the existing happiness literature. –Use rich psychosocial leave-behind data –doubles as an investigation of the determinants of baseline mood. c. Hypothetical-revealed-preference and predicted happiness measures using vignettes

D4. Happiness Literacy and Happiness a. Retirement Makes Possible the Major Input Into Long-Run Happiness: Time b. Factors That May Limit Happiness: 1.May Not Know the Household Production Function for Happiness 2.May Not Want to Make Feeling Happy a Priority c. Develop New Measures 1.Happiness Literacy 2.Preference (Motivation) for Happiness d. Implement New Measures as an HRS Module and Compare to HRS Measure of Happiness

D5. Test the implications of the elation theory for measuring marginal utility. a.Marginal utility of wealth a key concept for life-cycle C and labor supply; ALP planned to have C and labor data. b.Happiness does not measure utility, but the magnitude and duration of short-run spikes in happiness should be a useful indicator of marginal utility. c.We can elicit such an indicator of marginal utility on the ALP.

Reminder: Model of the Short- Run Dynamics of Happiness Happiness it = α i + β i f(ΔV i,t) + ε it α i = Individual Fixed Effect β i = Emotional Sensitivity Parameter t = Time Lapse Since Shock V i = H(W) + J(Z); W=Wealth; Z=Non-Mkt Wealth Shock: ΔV i = H(W 0 +ΔW) - H(W 0 ) Non-Market Shock: ΔV i = J(Z 0 +ΔZ) – J(Z 0 )

D5c. Collecting an Indicator of Marginal Utility on the ALP Measure Happiness Random doses of $5 to $50, with average expense of $15--$20 per respondent. Ask expectations questions to provide time lapse AND study the effects of exogenous movements in happiness on expectations Measure Happiness Again