Two Thought Experiments With everything that you know about what it was like 50 years ago, A. Would you rather have been born 50 years earlier than you were actually born? B. If you had to give up a child for adoption, would you rather give it up for adoption to a random family in the U.S. of today, or in a random family in the U.S. of 50 years ago? 1

2 The Economics of Happiness 2009 H. Chase Stone Lecture at Colorado College Miles Kimball

Outline Theory New Empirical Investigations 3

4 Partial List of Coauthors on Related Papers “Utility and Happiness,” by Kimball and Robert Willis “Unhappiness After Hurricane Katrina” by Kimball, Helen Levy, Fumio Ohtake and Yoshiro Tsutsui “The Dynamics of Happiness After Major Life Events” by Kimball, Ryan Nunn and Dan Silverman “Happiness Literacy and Happiness Motivation” by Dan Benjamin and Kimball

5 Why Happiness Matters for Economics 1. Preference for Happiness: Many people value happiness, as evidenced by the fact that they will sacrifice other things for the sake of happiness. 2. News and Happiness: Short-run spikes and dips in happiness –signal what people consider good and bad news, –which in turn signals what they care about.

6 Two Definitions of “Happiness” The Greatest Good for an Individual Feeling Happy

7 Who Judges the Greatest Good for an Individual? An Authority Figure or the Speaker –“True Happiness” used as a cudgel Economics Defers to the Individual –Utility

8 Utilitarianism (Jeremy Bentham, John Stuart Mill) “The greatest good of the greatest number”  Solving social problems is important because it is a miserable experience to be poor, sick or downtrodden.  It is also important to make things better, wherever we can, even if they are already good. Utilitarianism is part of the philosophical foundation of economics.

9 Measuring Utility: The Modern Tradition of Economics Look at an individual’s choices (preferences). What an individual chooses indicates what she wants, cares about and values. This works well when the individual is –Well informed –Thoughtful –Not at war with self

10 Measuring Happiness, in the Narrow Sense of Feeling Happy On a scale from one to seven, where one is “extremely unhappy” and seven is “extremely happy,” how do you feel right now?

11 Greater Happiness in the Narrow Sense is Not Always a Good Thing Mania: too much happiness Too much sacrificed for the sake of feeling happier –Example: changing one’s political beliefs in order to be happier. –Charles Schultz, author of “Peanuts”

12 D istinguishing utility and happiness as a matter of logic. Utility = The extent to which people get what they want, where what they want is indicated by their choices. Happiness = How positive people’s feelings are at a given time.

13 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.

14 The Nature of Happiness (What Makes Us Feel Happy)

15 Key Facts about What Makes Us Feel Happy #1: Easterlin Paradox #2: Hedonic Adaptation

16 The Easterlin Paradox

17 The Evidence of Choices: Migration Flows Indicate that Income is Valuable to People 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.

Two Thought Experiments With everything that you know about what it was like 50 years ago, A. Would you rather have been born 50 years earlier than you were actually born? B. If you had to give up a child for adoption, would you rather give it up for adoption to a random family in the U.S. of today, or in a random family in the U.S. of 50 years ago? 18

19 Fact #1 In the long run, people can become better off without feeling happier.

Recent Challenges to the Easterlin Paradox: Money Does Buy Happiness. Consistently. Betsey Stevenson and Justin Wolfers present evidence that average happiness tracks per capita income in most countries. The U.S. is an outlier. Jean-Benoit Rousseau gives evidence that –The rich (who have been getting richer in the U.S.) have been getting happier. –It is the poor, whose income has been stagnant, who are getting less happy. 20

21 Happiness by Income Quintile

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“The Paradox of Declining Female Happiness” Betsey Stevenson and Justin Wolfers 23 Abstract: By most objective measures the lives of women in the United States have improved over the past 35 years, yet we show that measures of subjective well- being indicate that women’s happiness has declined both absolutely and relative to male happiness. The paradox of women’s declining relative well-being is found examining multiple countries, datasets, and measures of subjective well-being, and is pervasive across demographic groups.

24 Relative declines in female happiness have eroded a gender gap in happiness in which women in the 1970s typically reported higher subjective well-being than did men. These declines have continued and a new gender gap is emerging—one with higher subjective well-being for men. Our findings raise provocative questions about the contribution of the women’s movement to women’s welfare and about the legitimacy of using subjective well- being to assess broad social changes.

25 Fact #1 In the long run, people can become better off without feeling happier.

26 Hedonic Adaptation: “This, too, shall pass.” 1. After time has passed, things that surely had a big effect on happiness right after the event have surprisingly little effect on happiness. (Not just money.) incarceration loss of the use of limbs serious burns death of a spouse winning the lottery 2. The dynamics of national happiness after news

27 Fact #2 about Happiness Happiness depends more on changes than on the absolute level of one’s circumstances. Analogy: We have no altimeter in our brains, but we can tell whether we are going up or down.

28 The Elation Theory of 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 depends on one’s daily actions

29 Elation and Hedonic Adaptation Because it is based on recent news, elation fades, –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. –This can help explain why, in the long run, becoming better off may not lead to greater happiness.

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

31 The Evolutionary Psychology of Hedonic Adaptation Analogy: Adjustments in the pupil of the eye protect the eye and enhance sensitivity. Protect: Being too happy or too sad has physical costs. Hedonic adaptation protects from these costs. Enhance Sensitivity: “Hedonic adaptation may also increase our sensitivity to, and motivation to make, local changes in our objective circumstances….” (Frederick and Loewenstein)

32 Speculations on The Evolutionary Psychology of Baseline Mood High social rank makes it safe to look more for opportunities than for dangers. –Thus, it makes sense to stimulate the same machinery turned on by the receipt of good news. Optimists and pessimists need each other. Quirks in the system? –Pinker’s cheesecake

33 Raising Baseline Mood: How to Raise Happiness in the Long Run 1.Prozac and Talk Therapy 2.Taking Care of Oneself Sleep Exercise Eating well 3.Enjoyable Activities Spending time with friends An engrossing hobby

34 How to Raise Happiness in the Long Run (cont.) 4. Positive attitudes Gratitude Forgiveness Acceptance of one’s situation 5.Raising one’s income without sacrificing sleep, exercise, time with friends, … 6.Raising one’s social rank

35 The Problem with Happiness from Social Rank The usual strategies for raising social rank are a zero sum game—anything that works for one person makes everyone else worse off by lowering their social rank However, we can –Choose the right pond –Help the unfortunate –Treat one another with dignity

36 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.

37 A Non-Judgmental View of the Effect of Materialism on Happiness Materialism lowers happiness (weak, but interesting evidence). Tradeoff between happiness and other goods. Materialism means higher preferences for other goods compared to happiness.

38 Why Doesn’t Rising Income for the Lower Income Quintiles Lead to Greater Happiness? 1. Lack of Understanding of Happiness? 2. More internal conflicts from greater income? –obesity –drug use 3. Negative externalities from others’ freedom? –breakdown of community –divorce 4. Resources spent on increased lifespan? 5. Raising one’s happiness takes time.

39 Relationship to the Orthodoxy of Other Happiness Researchers People value happiness (and will sacrifice other goods for it) versus People should be maximizing happiness (economists often interpret this as saying that happiness is the true utility function).

40 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.

41 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.

Empirical Projects Tradeoffs between happiness and other goods –“Happiness Literacy and Happiness Motivation” High frequency movements in happiness –“The Dynamics of Happiness After Marjor Life Events” –“Unhappiness After Hurricane Katrina” –“The U.S. Elections of 2006 and 2008 and Happiness” 42

Happiness Literacy and Happiness Dynamics If happiness is a good that people trade off with other goods, valuing it highly should be associated with higher levels of happiness as people make more efforts and sacrifices to be happy. Knowing the facts about happiness should also help people be happy. 43

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48 The Dynamics of Happiness After Major Life Events June 5, 2007 Dan Silverman and Miles Kimball Using HRS data to observe the relationships between economically quantifiable life-events, such as the death of a spouse, and a quantifiable measure of happiness.

49 The Happiness Measure on the HRS and the Reuters/University of Michigan Surveys of Consumers “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?)”

50 Non-parametric estimates, w/controls

51 Parametric estimates, no fixed effects: MEN

52 Parametric estimates, no fixed effects: WOMEN

53 Parametric estimates, no fixed effects: w/ LIFE INSURANCE

54 Parametric estimates, no fixed effects: NO LIFE INSURANCE

55 Findings Quick Hedonic Adaptation (Mean Reversion of Happiness) Men react more than women Those without life insurance react more than those who do have life insurance.

56 Two Strategies for Using Happiness Data to Value Non- Marketed Goods Divide the effect of the non-marketed good on the long-run level of happiness by the effect of money on the long-run level of happiness. Divide the effect of news about the non- marketed good on the dynamics of happiness (lost area under the curve) by the effect of news about money on the dynamics of happiness.

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“Unhappiness After Hurricane Katrina” Kimball, Levy, Ohtake, Tsutsui 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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The U.S. Elections of 2006 and 2008 and Happiness Kimball, Ohtake, Titiunik Tsutsui 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 measure of the strength of preferences. (2008 elections)

Mainline ΔHappiness Regressions Pre- and post-election waves Pre-election intensity of preferences and change in happiness, pre-to-post-election Dependent variable is ΔHappiness Index (-100 to 100) (1)(2)(3)(4)(5)(6)(7)(8)(9) Surprise measure (studentized) (0.98)^(1.05)(0.95)^(0.98)(1.05) (0.96)^(1.05)(1.06) Obamamania (studentized) (0.98)(1.05)(1.00) (1.05)(1.06)(1.00)(1.06)(1.07) Emote Sensitivity (studentized) (0.83)^ (0.84)^(0.82)^(0.83)^(0.82)^ (1.01) Surprise*Obamamania (0.92)(0.93)(0.92)(0.93)(0.92) Surprise*Sensitivity (1.05)(1.03)(1.26)(1.24)(1.27) Obamamania*Sensitivity (0.91)(0.90)(1.10)(1.08)(1.14) Surprise*Obama*Sensitivity0.19 (1.21) N1314 R-squared All results are from OLS regressions. Standard errors robust to heteroskedasticity are in parentheses. All regressions also include a constant term.

Daily Happiness Dynamics in Response to News Kimball, Ohtake, Tsutsui 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

69 Unhappiness After Hurricane Katrina Miles Kimball Helen Levy Fumio Ohtake Yoshiro Tsutsui

70 The Happiness Measure on the Michigan Surveys of Consumers “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?)”

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75 Implications of the October Dip in Happiness It is difficult to explain this dip in happiness on the grounds that lifetime utility is seriously effected in terms of self-interest. If this dip in happiness is due to altruism, the happiness data told us something we might not otherwise have known: Americans cared quite a bit about those hurt by the earthquake in Pakistan—more than one would suspect from the donation data. –Katrina and Rita: >$2.65 Billion –South Asian Tsunami: >$1.55 Billion

76 Possible Explanations Response of Happiness to News about Lifetime Utility –Altruism –Self-Interest Direct Effect of Graphic Images of Suffering –Definition: Even if an individual watched video clips of a long-ago disaster, their happiness would still go down.

77 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.

78 Serious Harm to Self-Interest? The Index of Consumer Sentiment

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80 Arguments Against the “Graphic Images” Explanation Heavy news coverage of Katrina continued for 4 weeks, but happiness returned to normal after two weeks. This can’t reflect simple desensitization to graphic images, since heavy coverage of the suffering associated with the Iraq War had been going on for years, yet happiness fell after Katrina. Thus, the meaning—or at least the details—of the images seems to matter.

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82 Implications of the Greater Dip in Happiness in the Katrina Region The greater effect on the South Central region helps demonstrate that the dip in happiness is due to Katrina rather than to an extraneous circumstance. To the extent there was saturation coverage throughout the U.S., the “graphic images” explanation cannot explain the stronger negative effect on happiness in the South Central region.

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