Utility and Happiness

1
Utility and Happiness

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

2
Two Meanings of Happiness

• The Greatest Good for an Individual
• Feeling Happy

3
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?

4
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 revealed by their
  choices.
• Happiness (Current Affect) How positive
  peoples feelings are at a given time.

5
The Ethical Question

• 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.
• What if public policy choice A accords with what
  people would choose, but policy choice B would
  make them feel best?

6
The Neobenthamites

• Currently, the standard view among psychologists
  and most economists working with happiness
  dataarticulated most forcefully by Daniel
  Kahnemanis that a present discounted value of
  measured happiness is a good indicator of what
  people should be maximizing.
• To the extent that people are maximizing
  something else, it is viewed as a mistake.
• Factual mistakes people make in predicting their
  own future happiness are thought to be an
  important reason people make these optimization
  mistakes. (Return to this below.)

7
Our View

• We are questioning this orthodoxy.
• When well-informed and thoughtful, we view
  peoples choices as the best indication of their
  individual welfare.
• People do often make optimization errors.
• But much of what this orthodoxy takes as evidence
  of optimization errors, we take as evidence that
  utility and happiness are not the same thing.
  

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Evidence that Utility?Happiness

• People who knowingly, thoughtfully and without
  regret choose not to maximize long-run happiness
  indicate that utility?happiness for them.
• 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 ones child through
  college.
• Having a baby?
• Doing ones duty.

9
The Scientific Question What is the Relationship
Between Preferences and Happiness?

• Both felt happiness and choice-based preferences
  are well-defined, observable concepts.
• The nature of the relationship between the
  standard psychological concept of happiness and
  the standard economic concept of preferences is
  an open empirical question.

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Why the Story about Preferences and Happiness
Cant be Simple

• Easterlin Paradox
• Hedonic Adaptation

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The Easterlin Paradox
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Hedonic Adaptation (Mean Reversion of
Happiness)This, too, shall pass.

• 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.
• Dynamics of national happiness after big news
• Unhappiness after Hurricane Katrina

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The Happiness Index

• 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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An Integrated Theory of Utility and Happiness

• A. Preference for Happiness Many people value
  happiness, as evidenced by the fact that they
  will sacrifice other things for the sake of
  happiness.
• B. 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.

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Preference for Happiness Axiom

• Preferences depend on the joint stochastic
  process of
• S vector of state variables
• C vector of control variables
• H current happiness (affect)
• B other outputs of household production
  functions (e.g. health)
• There is an intertemporal expected utility
  representation over these ultimate goods
• at least weakly increasing in H at every date and
  in every state of nature.

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Evidence in Favor of a Preference for Happiness

• 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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Contrast with the Neobenthamite View

• People value happiness
• (and will sacrifice other goods for it)
• versus
• People should be maximizing happiness
• (often interpreted as saying that happiness is
  the true utility function).

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Arguments of Happiness beyond S,C,B
Qt control variables that do not matter
directly for preferences, but affect household
production of happiness (empty set? psychoactive
and other medical drugs, recreational drugs?)
Jt state variables that do not matter directly
for preferences but affect household production
genes, underlying physical and psychological
states, unknown parameter values and shocks.
vt, vt-1, vt-2, the history of lifetime
utility.
(Note BB(S,J,C,Q))
20
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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The News and Happiness Axioms

• Happiness at time t is a function of
• the other ultimate goods, S, C and B,
• an additional state variable vector J
  (unobserved?)
• an additional control variable vector Q,
• and the history of realized lifetime utility v
  through time t.
• --Holding all other arguments of happiness fixed,
  the agent is
• 2. Happier if current expected lifetime utility
  is of a preferred future.
• 3. Less happy if past expected lifetime utility
  was of a preferred future.

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Simultaneous Determination of Utility and
Happiness

• News and Happiness Axiom 4 is an ordinal version
  of the kind of assumptions that guarantee a
  contraction mapping, so that there is a
  well-defined solution to the simultaneous
  determination of utility and happiness.
• Although preferences over ultimate goods exhibit
  intertemporal expected utility,
• the derived preferences over the fundamentals (S,
  J)K and (C,Q)X can exhibit reference-dependence
  and loss aversion as in Prospect Theory.

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Lifetime Utility in the Additively Separable Case
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The Innovation ? in Lifetime Utility v(Additive
Separability, Observed K)
Note about the lifetime utility innovation
so
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News and Happiness Axioms Additive
Separability Imply
Axiom 2?
Axiom 3?
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Baseline Mood M and Elation e
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The Elation Theory of Happiness
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The Elation Theory of Happiness(In Words)

• 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.)

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Key Implications of the Happiness and News Axioms

• A theory of happiness can be described in terms
  of the objects that are well-defined by revealed
  preference
• The fundamentals (state and control variables and
  outputs of household production functions) that
  people care about
• and
• The history of which indifference curves for
  lifetime plans one has been on.
• Old news about the future matters less for
  happiness than recent news about the future.

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Loss Aversion from Elation Theory Happiness
Additively Separable with Elation Concave in
Lifetime Utility Innovations

• U(K,X,H,A)F(K,X)M(K,X)
• a0min(?t, ?t/2)
• 
  a1min(?t-1, ?t-1/2)

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Elation-Independence Additively Separable
Happiness with Elation Linear in Lifetime Utility
Innovations

• U(K,X,H)u(K,X)M(K,X)
• a0?t a1?t-1

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Factual Mistakes about Happiness Need Not Cause
Decision Mistakes

• 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 harm to utility maximization.
• However, mistakes about the controllable
  determinants of baseline mood will cause material
  harm.

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Raising Baseline Mood How to Raise Happiness in
the Long Run

• Prozac and Talk Therapy
• Taking Care of Oneself
• Sleep
• Exercise
• Eating well
• Enjoyable Activities
• Spending time with friends
• An engrossing hobby

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How to Raise Happiness in the Long Run (cont.)

• 4. Positive attitudes
• Gratitude
• Forgiveness
• Acceptance of ones situation
• Raising ones social rank

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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 The
Demand for Prozac

• If you learn more about the household production
  function for happiness, your behavior will change
  in a direction that takes advantage of that to
  raise happiness.
• Example Demand for Prozac will go up if
  information arrives that it is more effective in
  raising happiness than previously thought (with
  no new information about side effects).
• Demand will go down if information arrives that
  it is less effective at raising happiness than
  previously thought.

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Applying Price Theory to Baseline Mood
Materialism

• Materialism lowers happiness (weak, but
  interesting evidence).
• Tradeoff between happiness and other goods.
• Materialism means higher preferences for other
  goods compared to happiness.

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Applying Price Theory to Baseline Mood The
Easterlin Paradox Revisited

• Normality of baseline mood leads to a version of
  the Easterlin Paradox even in the context of our
  theory
• Why dont people buy higher baseline mood as
  part of their expanding consumption bundle?

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Why Doesnt Rising Income 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 ones happiness takes time.

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Why are Utility and Happiness Confused?

• Because they are dramatic, elation and dismay may
  dominate peoples 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.

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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 can be of enormous value, despite
  the Easterlin Paradox.
• Happiness data is not enough to diagnose
  optimization mistakes.

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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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Elation and Hedonic Adaptation

• Because it is based on recent news, elation
  fades,
• News doesnt 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.

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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

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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)

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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?
• Pinkers cheesecake

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Appendix A 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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The Validity of Self-Reported Happiness

• Correlated with
• observer ratings of happiness
• structured coding of facial expressions
• electrical measures of face muscle activation
• voice tone
• skin conductance, heart rate, blood pressure,
  etc.
• writing speed
• judgment of probabilities
• word association and word completion
• startle reflex
• left pre-frontal cortex activity (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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Affect Data Show Even Stronger Hedonic Adaptation

• Data on felt happiness from experience sampling
  or from the day reconstruction method reverts to
  its previous level even more completely than life
  satisfaction and global happiness assessments.
  Why?
• Life satisfaction and global happiness
  assessments incorporate
• an element of autobiography
• peoples ideas about how they should feel

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Appendix B 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
60
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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Revealed Preference Migration Flows

• Per capita GDP in Mexico is not far from what it
  was in the U.S. in the 1950s.
• 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.

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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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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.
3. Because of the speed of hedonic adaptation,
long lags are inconsistent with UAffect.

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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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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.

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(Long-Run) Happiness and Health

• Like health, happiness
• can be measured independently
• 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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Utility?Happiness Summary of the Argument

1. If only innovations in lifetime utility mattered
   for happiness, maximizing happiness and
   maximizing lifetime utility would be equivalent.
2. Focusing on only changes leaves out Rawlsian
   preferences.
3. Any predictable effect of choice variables on
   happiness implies innovations in lifetime utility
   are not the only component of happiness.
4. People who knowingly, thoughtfully and without
   regret choose not to maximize long-run happiness
   indicate that utility?happiness for them.