Utility and Happiness

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Utility and Happiness

• Miles Kimball and Robert Willis
• University of Michigan
• http//www-personal.umich.edu/mkimball/pdf/index.
  html

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A Growing Economic Literature Uses Happiness Data

• Provocative findingssee Layards Happiness
• Mostly focuses on the cross-section and the
  long-run trend.
• Motivations of the researchers
• to study the welfare implications of non-traded
  goods
• to diagnose optimization mistakes and study
  welfare implications in contexts where choice
  behavior is potentially inconsistent.
• Many other economists are skeptical the
  theoretical status of happiness is unclear.

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What is Happiness?

1. Flow utility?
2. The individuals overall objective function?
3. The part of the individuals objective function
   that abstracts from the desire to do ones duty?
4. The individuals objective function plus pleasure
   from memory?
5. None of the above?

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Outline of Introduction

• Distinguishing utility and happiness as a matter
  of logic.
• Why we care about utility and happiness.
• Why the relationship between them cant be simple
  (short version).
• Our take on the relationship between utility and
  happiness.

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A. Utility and Happiness

• 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
  peoples feelings are at a given time.

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B. Judging Individual Welfare

• Peoples own choices and feelings are the two
  non-paternalistic indicators we have for
  individual welfare (what makes an individual
  better off in the sense relevant for policy).
• A priori, both seem useful.

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C. The Easterlin Paradox and Hedonic Adaptation

• Taking both feelings and choices seriously runs
  into the difficulty that affect and utility seem
  to behave quite differently.
• Easterlin Paradox Measured utility trends
  strongly upwards, while measured happiness has
  little trend.
• Hedonic Adaptation Utility is affected
  permanently by permanent changes in external
  circumstances, but the effects on happiness seem
  shorter-lived.

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D. The Relationship Between Happiness and Utility
is Unresolved

• Existing work in Economics largely either
• ignores happiness data, e.g.
• Happiness is irrelevant to Economics
• OR
• B. assumes happinessflow utility
• Happiness is a sufficient statistic for
  utility.

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The Middle Way

• In this paper, we steer a middle course between
  these two extremes
• Happiness ? Flow Utility,
• BUT
• Happiness has a systematic relationship to
  utility.

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The Question What is the Relationship?

• Both felt happiness and choice-based utility are
  well-defined, observable concepts. It is easy to
  resolve many seeming paradoxes when one
  recognizes that these are two different things.
• The nature of the relationship between the
  standard psychological concept of happiness
  (affect) and the standard economic concept of
  lifetime utility is an open empirical question.

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Significance

• Establishing any systematic relationship between
  affect and utility would
• provide an important bridge between psychology
  and economics.
• allow psychological data and theory to be used in
  economics in a way that is complementary to
  standard economic data and theory.
• allow all the tools of economics to be brought to
  bear toward understanding happiness.

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Sketch of our Integrated 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 a
  subutility function (like health, entertainment,
  or nutrition.)

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Why Happiness Matters for Economics (Our View)

• First, short-run happiness in response to news
  can give important information about preferences.
  
• Second, long-run happiness is important for
  economic welfare in the same way as other
  composite goods such as health, entertainment, or
  nutrition.

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The Core of the Paper

• 3. Measuring Happiness
• 4. Measuring Utility
• 5. Utility ? Happiness Evidence
• 6. An Integrated Theory of Utility and
  Happiness

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Bonus Features

• 7. Why Utility and Happiness are Often Confused
• 8. Elation in the Utility Function
• 9. Implications for Happiness Empirics
• 10. Implications for Policy

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3. Psychologists Reliably Measure Happiness, But
What Is It?

• Some economists think happiness cant be measured
  well. This is just not true. Current happiness
  (affect) is one of the easiest of all subjective
  concepts to measure.
• What is true (that these economists are
  intuiting) is that once happiness is measured, we
  dont know what it means in terms of economic
  theory.

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Measuring Current Happiness (Affect).

• 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
• Much of the time during the past week, you felt
  you were happy. (Would you say yes or no)?
• (Much of the time during the past week,) you felt
  sad. (Would you say yes or no?)
• (Much of the time during the past week,) you
  enjoyed life. (Would you say yes or no?)
• (Much of the time during the past week,) you felt
  depressed. (Would you say yes or no?)

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The Validity of Self-Reported Happiness

• Correlated with
• frequency of smiling.
• others ratings of how happy someone is.
• social rank.
• high activity in the left pre-frontal cortex and
  low activity in the right pre-frontal
  cortex--which can also be induced by seeing
  pictures of a smiling baby and reduced by seeing
  pictures of a deformed baby.

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Other Measures of Subjective Well-Being Life
Satisfaction

• On a scale from 1 to 10, how satisfied are you
  with your life?

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World Values Survey Global Happiness Question

• "Taking all things together, would you say you
  are
• Very happy
• Quite happy
• Not very happy
• Not at all happy
• 9. Dont Know Do NOT READ OUT

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Problems with these Alternative Measures of
Subjective Well-Being

• Judging overall life-satisfaction or overall
  happiness in life is a complex cognitive task.
• Evidence on the sensitivity of of subjective
  well-being data to context indicates that
  respondents use shortcuts involving readily
  accessible information, such as
• How happy the respondent feels right now
• How happy the respondent thinks he or she should
  feel, given objective circumstances.

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Advantages of Affect Measures (Current Happiness
Measures)

• By contrast, affect measures depend on much more
  accessible information
• How R feels right now.
• How R felt the past week.
• Very little judgment is required.
• How R feels right now affects the overall
  life-satisfaction or global happiness questions
  anyway. It is clearer to focus on that current
  happiness component directly. Then we know what
  we are getting.

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4. Measuring Utility Revealed Preference Over
Choices

• The Ordinalist, or revealed preference
  revolution in Economics developed techniques for
  measuring individual welfare based on choice data
  alone.
• This clearly defines utility as a distinct
  concept from happiness.
• Utility is the extent to which people get what
  they want.
• Happiness is how people feel.

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The Trend in UtilityChoose between 1955 and 2005

• The electronics revolution and the Internet have
  vastly expanded access to a rapidly growing
  quantity of culture and science.
• Crime, teenage pregnancy and drug abuse worsened
  at first but now trend downward.
• Greater equality between races and sexes.
• War on Terror better than Cold War.
• Better medical care and greater longevity.

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Life Expectancy
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Would you want to go back to the way things used
to be?

• No computers or electronics
• No Ben and Jerrys
• No Harry Potter
• No Beatles music yet released
• Jim Crow, strong male dominance
• Cold War
• Few modern drugs

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Do People Know Their Own Utility Functions?

• Not perfectly. For example, I dont know if I
  will like a new flavor of ice cream.
• Lack of knowledge of ones own utility function
  can be modeled as an internal informational
  constraint. (Rayo-Becker is an example.)
• The key distinguishing features of mistakes about
  ones own utility function are
• regret
• changing ones mind after learning more.

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Can Happiness Data Alone Diagnose Optimization
Mistakes?

• No. Happiness data alone cannot diagnose a
  mistake without strong assumptions about the
  relationship between utility and happiness.
• Even the relevance of mistakes in predicting
  future happiness depends on the relationship
  between happiness and utility.
• In Section 8 C, we illustrate how people could
  make mistakes in the impulse response pattern of
  future happiness without impairing optimization
  at all.

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5. Happiness ? Flow Utility Evidence

• Assuming that current happiness is equal to flow
  utility immediately has many strong implications.
  
• In particular, a large amount of data on
  happiness exists, with many characteristics that
  do not match usual ideas about utility.
• Measured happiness
• has no strong trend.
• is strongly mean-reverting.

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The Easterlin Paradox
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Hedonic Adaptation(Mean Reversion of Affect)

• Cross-sectional evidence of hedonic adaptation
  for
• incarceration
• loss of the use of limbs
• serious burns
• death of a spouse
• winning the lottery
• winning 10,000 raises affect by six times as
  much in the first year as 10,000 per year in
  additional income.

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Experience Data Show Even Stronger Hedonic
Adaptation

• Data on felt happiness from experience sampling
  reverts to its previous level even more
  completely than life satisfaction and global
  happiness assessments (Kahneman and Schwartz,
  unpublished work). Why?
• Life satisfaction and global happiness
  assessments incorporate
• an element of autobiography
• peoples ideas about how they should feel

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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.

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Evidence on Habit Formation
Constantinides Form
1. Joseph Lupton estimates ?.75 based on
portfolio choices 2. Impulse responses for
consumption choices suggest ? close to zero
unless the lags in the habit H are very long.

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Modeling Choice Habit Formation or Just Hedonic
Adaptation?
Suppose

and
1. Equivalent to
and happinessfirst difference of flow utility.
2. Lets keep the economic theory simple and put
the complexity in the utility-happiness
relationship. a. Its clearer and simpler.
b. It avoids the misleading impression that
there is anything wrong with the more
traditional functional form.
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Other Evidence that Utility?Happiness

• 1. People make choices eagerly that they never
  regret, but which have no long-run effect on
  their affect.
• Moving to a new city
• Buying a nice car
• 2. With some misgivings at the tradeoff, people
  make choices that they never regret which lower
  their affect.
• Commuting further to a higher-paying job.
• Longer working hours to put ones child through
  college.

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6. Integrated Theory of Utility and Happiness
happiness baseline mood elation.

• A. Elation
• B. Baseline Mood
• C. Formal Model
• D. Expectations and Happiness
• E-G. Evolutionary Significance
• -Elation
• -Hedonic Adaptation
• -Baseline Mood
• H. Implications of the Integrated Theory

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News and Happiness

• The relationship between circumstances and
  happiness is weak in the long run,
• BUT
• No one disputes that in the short run happiness
  responds in an intuitive way to news about
  lifetime utility.
• Thus, we argue that an important component of
  happiness is due to recent news about lifetime
  utility.

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Elation and Dismay

• elation the component of happiness due to
  recent news about lifetime utility.
• dismay -elation

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Elation and Hedonic Adaptation

• If expectations are rational, standard results
  about rational expectations imply that elation
  will be strongly mean reverting. Intuitively,
• News doesnt 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.

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Baseline Mood

• baseline mood M(Kt, Xt)
• Xt vector of control variables time use,
  spending pattern, portfolio choice, etc.
• Kt vector of
• state variables encoding every aspect of the past
  that matters for utility wealth, weight, habits,
  level of fatigue, ones spouse being alive, etc.
• variables exogenous to the individual weather,
  state of macroeconomy, consumption patterns of
  others in society, etc.
• CONTINUED ON NEXT SLIDE ?

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Baseline Mood and Flow Utility

• flow utility U(Kt, Xt, M(Kt, Xt))
• We think of baseline mood M(Kt, Xt) as the
  component of happiness produced by a household
  production function.
• A good analogy is to health. Like health,
  baseline mood
• can be measured independently of Kt and Xt
• is only one argument of the flow utility function
• depends on different things than flow utility
  does (or on the same things with different
  weights)
• has a complex household production function

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What does Baseline Mood Depend on?

• Any persistent aspect of happiness is part of
  baseline mood. Genes are the biggest factor.
  Also, there is some evidence that each of the
  following has a persistent effect on happiness
• a. Prozac
• b. sleep
• c. exercise
• d. good eating habits
• e. social rank
• pleasantness of ones current activity

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Do People Know the Production Function for
Baseline Mood?

• Just as people dont know the true production
  function for health, they may not know the true
  production function for baseline mood.
• Lack of understanding of the dynamics of the
  elation mechanism could make it difficult for
  individuals to parcel out the determinants of
  baseline mood.
• The discovery and dissemination of facts about
  the determinants of baseline mood could have
  large positive welfare effects
• A big deal if the share of the money and time
  budget devoted to baseline mood trends up.

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Applying Price Theory to Baseline Mood

• Is baseline mood a luxury good?
• Even normality of baseline mood leads to a
  version of the Easterlin Paradox
• Why dont people buy higher baseline mood as
  part of their expanding consumption bundle?
• Two potential answers
• Some uptrending negative externalities may be
  particularly bad for baseline mood.
• The relative price of baseline mood may be
  trending up. (A large effect if the elasticity
  of substitution between baseline mood and other
  goods is high.)

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Formal Model of Utility and Happiness
vt lifetime utility U flow utility M
baseline mood Et rational expectation as of
time t ß impatience Kt state vector
wealth, weight, fatigue, being alive,
spouse being alive, genes, weather,
prices, tax rates, pollution average level
of consumption in society Xt control vector
consumption, time use
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The Innovation in Lifetime Utility and Elation
Note about the lifetime utility innovation
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Theory of Happiness (Current Affect)
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Neurobiological Evidence that Expectations Matter
for Affect

• These studies measured the firing of dopamine
  neurons in the animals 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 monkeys mouth.
• Initially, the neurons did not fire until the
  juice was delivered.

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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)

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The Evolutionary Psychology of Elation and Dismay

• Functionally, elation and dismay may motivate
  cognitive processingmuch 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.

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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).

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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 Pinkers view of cheesecake.

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Three Implications of this Theory of Happiness

• Happiness ? Utility.
• Disputes the idea that temporary movements in
  affect are unimportant
• a temporary movement in affect can signal
  important utility-relevant news related to the
  long-term welfare of the individual.
• Baseline mood is not a summary measure of
  utility, but it is something people care about.

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Bonus Features

• 7. Why Utility and Happiness are Often Confused
• 8. Elation in the Utility Function
• 9. Implications for Happiness Empirics
• 10. Implications for Policy

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7. Why Utility and Happiness are Often Confused

• If baseline mood is exogenous to the individual,
  and elation is linear in lifetime utility
  innovations, maximizing any positive linear
  combination of current and expected future
  happiness is equivalent to maximizing lifetime
  utility.

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Why are Utility and Happiness Confused?
(continued)

• Elation and dismay may dominate peoples
  perception of happiness, but without much
  conscious awareness of the resetting of the
  implicit reference point that depends on past
  expectations of lifetime utility.
• The reference point is a sunk cost that does not
  affect maximization, so lack of awareness of it
  is not a problem.

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8. Elation in the Utility Function

• So far,
• a. flow utility U(Kt, Xt, M(Kt, Xt))
• What if
• b. flow utility U(Kt, Xt, M(Kt, Xt))
• b0?tb1?t-1b2?t-2
• c. or flow utility
• U(Kt, Xt, M(Kt, Xt),e(?t,?t-1,?t-2,))
  )

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Elation in the Utility Function Might Not Change
a Thing

• Given rational expectations, adding a linear
  combination of lifetime utility innovations to
  the utility function has no effect on the
  preferences represented.
• In this case, mistakes about the rate of hedonic
  adaptation cause no material harm to utility
  maximization.

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Can Manipulating Ones 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
  ones perceptions is to lower ones memory of
  past expectations. (Attitude of gratitude)
  

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Manipulating Perceptions of Locus of Control

• Elation may respond more to news about whether
  ones choices worked out than to news about
  things beyond ones control.
• This would make it possible to manipulate elation
  by labeling good events as due to ones efforts,
  while bad events were beyond ones control.

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Elation and Prospect Theory

• In the nonlinear case, elation theory yields
  prospect theory very naturally. In particular,
  if
• a. Elation is roughly proportional to the rate of
  cognitive processing of news.
• b. Bad news requires more processing than good
  news.
• c. Within bad or good news, the total amount of
  processing needed is proportional or less than
  proportional to the magnitude of the news.
• Thus, Prospect Theory can arise from rational
  preferences over ones own emotions.

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9. Implications for Happiness Empirics

• The time series properties of happiness matter.
• Price Theory can be used to study baseline mood
  (e.g., value of happiness).
• The Elation Theory is readily testable.
• Elation provides information about preferences
  and expectations.
• Like event studies in Finance
• Need high frequency data on affect.

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10. Implications for Policy

• Happiness is valuable should be fostered.
• Happiness data are a reminder of tangible and
  intangible externalities in the utility
  functionespecially social rank externalities.
• Economic growth is of enormous value, despite the
  Easterlin Paradox.
• Happiness data is not enough to diagnose
  optimization mistakes.

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Reprise Integrated Theory of Utility and
Happiness

• 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 a
  subutility function (like health, entertainment,
  or nutrition.)

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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.

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The Integrated Theory of Utility and Affect
Axioms

• 1. Happiness and news other things being equal,
  
• a. the agent will feel happier if current
  expectations are of a preferred future.
• b. the agent will feel less happy if past
  expectations were of a preferred future.

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The Integrated Theory of Utility and Affect
Axioms

• 2. Preference for happiness. Between two fully
  anticipated life courses with the same outward
  circumstances, the agent prefers the one in which
  he or she feels happier.
• 3. Social Rivalry. The empirical possibility of
  social rivalry is represented by the absence of
  an axiom that preferences depend only on the
  agents own situation.

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Preference for Happiness Discussion

• The preference for happiness shows up in both
  household and firm behavior
• Purchases of therapy, Prozac, self-help books,
  magazines featuring happiness.
• Advertising that tries to suggest that a product
  will make one feel happy.

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Preference for Happiness Discussion

• The preference for happiness axiom is a
  relatively cautious assumption.
• It allows for the possibility that people have
  other pragmatic concerns beyond the extent to
  which those concerns show up directly in felt
  happiness. For example, they may care about
  satisfying basic drives, the happiness of family
  members, health, ethical concerns and other
  goals.

72
Preference for Happiness Discussion

• One could make stronger assumptions but the
  axioms above are enough for our approach.
• Cautious assumptions have the advantage of being
  more likely to gain broad acceptance within
  Economics.

73
An Alternative, Stronger, Assumption

• Sufficient Statistic Hypothesis some combination
  of current and expected future happiness is a
  sufficient statistic for the agents preferences.
• The Preference for Happiness Axiom allows for the
  Sufficient Statistic Hypothesis as a special case
  that, in principle, is empirically testable.
• -Happiness can be measured by feelings.
• -Preferences can be measured by choices whenever
  people are well informed and have time to make a
  careful choice.

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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 and on whether
   the additional economic resources 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 in
  other areas.

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Significance

• 3. Economists are increasingly using subjective
  well-being data to address economic and public
  policy issues that involve non-marketed goods or
  inconsistent preferences. Identifying the
  implications of subjective well-being data for
  economic issues requires attention to the details
  of the mapping between subjective well being data
  and standard economic 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 to be
  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 and
  family relationships, sense of purpose, and
  quality of leisure time pursuits.)

79
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.