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545
Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles
, 2007
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A model of reference‐dependent preferences
- Quarterly Journal of Economics
, 2006
"... We develop a model that fleshes out, extends, and modifies existing models of referencedependent preferences and loss aversion while accomodating most of the evidence motivating these models. Our approach makes reference-dependent theory more broadly applicable by avoiding some of the ways that prev ..."
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Cited by 232 (8 self)
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We develop a model that fleshes out, extends, and modifies existing models of referencedependent preferences and loss aversion while accomodating most of the evidence motivating these models. Our approach makes reference-dependent theory more broadly applicable by avoiding some of the ways that prevailing models—if applied literally and without ancillary assumptions—make variously weak and incorrect predictions. Our model combines the reference-dependent gain-loss utility with standard economic “consumption utility ” and clarifies the relationship between the two. Most importantly, we posit that a person’s reference point is her recent expectations about outcomes (rather than the status quo), and assume that behavior accords to a personal equilibrium: The person maximizes utility given her rational expectations about outcomes, where these expectations depend on her own anticipated behavior. We apply our theory to consumer behavior, and emphasize that a consumer’s willingness to pay for a good is endogenously determined by the market distribution of prices and how she expects to respond to these prices. Because a buyer’s willingness to buy depends on whether she anticipates buying the good, for a range of market prices there are multiple personal equilibria. This multiplicity disappears when the consumer is sufficiently uncertain about the price she will face. Because paying more than she anticipated induces a sense of loss in the buyer, the lower the prices at which she expects to buy the lower will be her willingness to pay. In some situations, a known stochastic decrease in prices can even lower the quantity demanded.
Beyond money: toward an economy of well-being
- PSYCHOLOGICAL SCIENCE IN THE PUBLIC INTEREST
, 2004
"... Policy decisions at the organizational, corporate, and governmental levels should be more heavily influenced by issues related to well-being––people’s evaluations and feelings about their lives. Domestic policy currently focuses heavily on economic outcomes, although economic indicators omit, and ev ..."
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Cited by 219 (2 self)
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Policy decisions at the organizational, corporate, and governmental levels should be more heavily influenced by issues related to well-being––people’s evaluations and feelings about their lives. Domestic policy currently focuses heavily on economic outcomes, although economic indicators omit, and even mislead about, much of what society values. We show that economic indicators have many shortcomings, and that measures of well-being point to important conclusions that are not apparent from economic indicators alone. For example, although economic output has risen steeply over the past decades, there has been no rise in life satisfaction during this period, and there has been a substantial increase in depression and distrust. We argue that economic indicators were extremely important in the early stages of economic development, when the fulfillment of basic needs was the main issue. As societies grow wealthy,
Behavioral Economics: Past, Present, Future
"... Behavioral economics increases the explanatory power of economics by providing it with more realistic psychological foundations. This book consists of representative recent articles in behavioral economics. This chapter is intended to provide an introduction to the approach and methods of behavioral ..."
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Cited by 109 (3 self)
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Behavioral economics increases the explanatory power of economics by providing it with more realistic psychological foundations. This book consists of representative recent articles in behavioral economics. This chapter is intended to provide an introduction to the approach and methods of behavioral economics, and to some of its major findings, applications, and promising new directions. It also seeks to fill some unavoidable gaps in the chapters’ coverage of topics.
Does happiness adapt? A longitudinal study of disability with implications for economists and judges
, 2007
"... This paper is an empirical study of partial hedonic adaptation. It provides longitudinal evidence that people who become disabled go on to exhibit considerable recovery in mental well-being. In fixed-effects equations we estimate the degree of hedonic adaptation at-- depending on the severity of the ..."
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Cited by 98 (26 self)
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This paper is an empirical study of partial hedonic adaptation. It provides longitudinal evidence that people who become disabled go on to exhibit considerable recovery in mental well-being. In fixed-effects equations we estimate the degree of hedonic adaptation at-- depending on the severity of the disability-- approximately 30 % to 50%. Our calculations should be viewed as illustrative; more research, on other data sets, is needed. Nevertheless, we discuss potential implications of our results for economists and the courts.
Toward national wellbeing accounts
- American Economic Review
, 2004
"... Economists have traditionally eschewed direct measures of well-being on methodological grounds: the private nature of experience and the discomfort of making interpersonal comparisons. Instead, income is often used as a proxy for opportunities and well-being. If people are not fully rational, howeve ..."
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Cited by 80 (0 self)
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Economists have traditionally eschewed direct measures of well-being on methodological grounds: the private nature of experience and the discomfort of making interpersonal comparisons. Instead, income is often used as a proxy for opportunities and well-being. If people are not fully rational, however, their choices will not necessarily maximize their experienced utility, and increasing their opportunities will not necessarily make them better off (Kahneman, 1994; Cass R. Sunstein and Richard Thaler, 2004). Direct measures of experienced utility become particularly relevant in a context of bounded rationality. Furthermore, advances in psychology and neuroscience suggest that experienced utility and well-being can be measured with some accuracy (Kahneman et al., 1999). Robust and interpersonally consistent relationships have been observed between subjective measures of experience and both specific measures of brain function and health outcomes. In part because of these findings, economic research using subjective indicators of happiness and life satisfaction has proliferated in recent years (see Bruno Frey and Alois Stutzer [2002] for a survey). Most work on well-being uses a question on overall life satisfaction or happiness. We suggest an alternative route based on time budgets and affective ratings of experiences. I. Plausible and Puzzling Findings of Well-Being Research Numerous studies have established that life satisfaction is weakly correlated with income and with religiosity, but uncorrelated with either
Kahneman D. Interpretations of utility and their implications for the valuation of health. The Economic Journal 2007
"... The term ÔutilityÕ can be interpreted in terms of the hedonic experience of an outcome (experienced utility) or in terms of the preference or desire for that outcome (decision utility). It is this second interpretation that lies at the heart of the methods that economists have developed to value non ..."
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Cited by 69 (10 self)
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The term ÔutilityÕ can be interpreted in terms of the hedonic experience of an outcome (experienced utility) or in terms of the preference or desire for that outcome (decision utility). It is this second interpretation that lies at the heart of the methods that economists have developed to value nonmarket goods, such as health. In this article, we argue that decision utility is unlikely to generate meaningful data on the utility associated with different experiences, and instead economists should look towards developing measures that focus more directly on experienced utility. The concept of utility is central to both normative and descriptive debates in economics. The word ÔutilityÕ has two distinct meanings: it can refer either to the hedonic experience of an outcome or to the preference or desire for that outcome. These have been labelled experienced utility and decision utility, respectively (Kahneman et al., 1997). Jeremy Bentham first defined utility in hedonic terms, as a measure of pleasure and pain (Bentham, 1789/1948), and economists followed that usage until the twentieth century. Francis Edgeworth even imagined a ÔhedonimeterÕ, an instrument that measures the utility of moments of experience and plots experienced utility as a continuous function of time (Edgeworth, 1881/1967). He proposed that the area under
Calculating tragedy: Assessing the costs of terrorism
- Journal of Economic Surveys
, 2007
"... Abstract. The trends and consequences of terrorist activities are often captured by counting the number of incidents and casualties. More recently, the effects of terrorist acts on various aspects of the economy have been analyzed. These costs are surveyed and put in perspective. As economic consequ ..."
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Cited by 66 (2 self)
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Abstract. The trends and consequences of terrorist activities are often captured by counting the number of incidents and casualties. More recently, the effects of terrorist acts on various aspects of the economy have been analyzed. These costs are surveyed and put in perspective. As economic consequences are only a part of the overall costs of terrorism, possible approaches for estimating the utility losses of the people affected are discussed. Results using the life satisfaction approach, in which individual utility is approximated by self-reported subjective well-being, suggest that people’s utility losses may far exceed the purely economic consequences.
Inequality at Work: The Effect of Peer Salaries on Job Satisfaction.” Working Paper No. 16396
- National Bureau of Economic Research
, 2010
"... We use a simple theoretical framework and a randomized manipulation of access to information on peers ’ wages to provide new evidence on the effects of relative pay on individual job satisfaction and job search intentions. A randomly chosen subset of employees of the University of California (UC) wa ..."
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Cited by 61 (1 self)
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We use a simple theoretical framework and a randomized manipulation of access to information on peers ’ wages to provide new evidence on the effects of relative pay on individual job satisfaction and job search intentions. A randomly chosen subset of employees of the University of California (UC) was informed about a new website listing the pay of University employees. All employees were then surveyed about their job satisfaction and job search intentions. Our information treatment doubles the fraction of employees using the website, with the vast majority of new users accessing data on the pay of colleagues in their own department. We find an asymmetric response to the information treatment: workers with salaries below the median for their pay unit and occupation report lower pay and job satisfaction, while those earning above the median report no higher satisfaction. Likewise, below-median earners report a significant increase in the likelihood of looking for a new job, while above-median earners are unaffected. Our findings suggest that job satisfaction depends directly on relative pay comparisons, and that this relationship is non-linear.
What Good Is Wealth without Health? The Effect of Health on the Marginal Utility of Consumption.” National Bureau of Economic Research Working Paper 14089
, 2008
"... Abstract: We estimate how the marginal utility of consumption varies with health. To do so, we develop a simple model in which the impact of health on the marginal utility of consumption can be estimated from data on permanent income, health, and utility proxies. We estimate the model using the Heal ..."
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Cited by 59 (7 self)
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Abstract: We estimate how the marginal utility of consumption varies with health. To do so, we develop a simple model in which the impact of health on the marginal utility of consumption can be estimated from data on permanent income, health, and utility proxies. We estimate the model using the Health and Retirement Study’s panel data on the elderly and near-elderly, and proxy for utility with measures of subjective well-being. Across a wide range of alternative specifications and assumptions, we find that the marginal utility of consumption declines as health deteriorates, and we are able to clearly reject the null of no state dependence. Our point estimates indicate that a one-standard-deviation increase in the number of chronic diseases is associated with a 10 to 25 percent decline in the marginal utility of consumption relative to this marginal utility when the individual has no chronic diseases. We present some simple, illustrative calibration results that suggest that state dependence of the magnitude we estimate can have a substantial effect on important economic problems such as the optimal level of health insurance benefits and the optimal level of life-cycle savings.
