The Brookings Institution, Washington, D.C.www.brookings.edu

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Can Happiness Research Contribute to Development
Economics and Policy?Presented to the World
BankFebruary 13, 2007

• Carol Graham
• University of Maryland/
• The Brookings Institution

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Why Happiness Economics?

• New method combining tools and methods of
  economists with those typically used by
  psychologists
• Method captures broader elements of welfare than
  do income data alone
• Method is uniquely well suited for analyzing
  questions where revealed preferences do not
  provide answers, for example the welfare effects
  of institutional arrangements individuals are
  powerless to change (like inequality or
  macroeconomic volatility) and/or behaviors that
  are driven by norms or by addiction and self
  control problems (alcohol and drug abuse,
  smoking, obesity)
• While economists traditionally have shied away
  from reliance on surveys (e.g. what people say
  rather than what they do), there is increasing
  usage of data on reported well being (happiness)
  
• a) consistent patterns in the determinants of
  well being across large N samples across
  countries and across time
• b econometric innovations help account for error
  and bias in survey data (AND with the error that
  exists in all kinds of data!!)

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Why NOT Use Happiness Surveys

• Biases in the way people answer surveys (question
  ordering/random events)
• Adaptation at individual and country levels
• a) individual level some psychologists believe
  that people ALWAYS adapt to their set point, even
  after extreme events like divorce or spinal cord
  injuries THUS if a poor peasant, who has adapted
  to his/her condition and/or has low aspirations
  due to lack of information reports he/she is
  happy, what can development economists do with
  this information?
• b) country level Easterlin paradox - average
  happiness levels have not increased as rich
  countries get richer and make improvements in
  other areas such as health, education
  BUT
• how long does it take individuals to adapt to
  these extreme changes? Equilibrium could be a
  LONG time away..Do we not care about several
  years of very low well being levels caused by
  certain phenomena?
• most relevant information is about individual
  well being country level averages do not tell us
  much and it is difficult to control for
  error/cultural traits, etc. Do we really care if
  Nigerians are happier than Ghanaians just because
  they have a tendency to respond in a more
  cheerful manner?
• WITHIN countries, wealthier, healthier, and more
  educated people are happier than poorer, less
  healthy, and less educated ones and have more
  time to enjoy those lives

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What can this approach contribute to development?
To the debate on globalization, poverty, and
inequality?

• Major discrepancies between positive assessments
  of the benefits of globalization for the poor and
  for poor countries by economists, and the more
  negative assessments of the typical lay person on
  the street
• In some contexts, these assessments are positive
  in others they are very negative and are even
  associated with widespread public frustration,
  political protest, and civic unrest
• Our research based on well being surveys of
  thousands of individuals in developing countries
  world-wide finds that counter to the received
  wisdom - public frustration is NOT most evident
  among the poor, but rather among upwardly mobile,
  low and middle income individuals
• Frustration is associated with mobility,
  inequality, and insecurity e.g. with dynamic
  trends - rather than with static poverty
• Our approach is based on analyzing the dynamics
  of poverty and inequality, rather than using the
  usual static measures and focus on equilibrium
• It is also based on comparing perceptions of well
  being to objective, income-based measures

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Peru, 2000
Significance in the difference of the means
between Fas and non-FAs at the 10, at the
5, at the 1 level.
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Russia, 1998
Significance in the difference of the means
between Fas and non-FAs at the 10, at the
5, at the 1 level.
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The effects of happiness on income
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Happiness Gap in Honduras and Chile
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Conclusions

• Happiness economics can give us a novel insights
  into the development process, which complements
  those provided by income-based measures,
  accepting that there is a margin for error and
  for the role of personality traits driving
  results (which can, at times, be corrected for)
• Research highlights unhappiness/frustration
  related to volatility, insecurity, and
  inequality, even among upwardly mobile
  respondents. Some of this unhappiness is the
  result of rising expectations related to
  development. It may also reflect genuine
  grievances created or exacerbated by
  globalization related trends, such volatility,
  inequality, and a marked increase in information
  about the living standards of others
• We also have evidence that happiness and
  unhappiness are in turn linked to future outcomes
  in the labor market and in the health arena.
  There may also be a link to political behavior,
  although we only have information on attitudes
  rather than actual voting
• Most recent research is testing whether these
  attitudes and in particular low expectations
  for the future and related unhappiness can
  result in higher discount rates and less
  willingness to invest and save for the future, in
  the income, health, and political (e.g. support
  for reform) arenas (topic for future research)
• Other new research finds that happiness/optimism
  is highest among the poorest respondents in
  Africa exploring whether it is due to selection
  bias (need to be optimistic to survive in such
  extreme contexts) )or whether it merely reflects
  individuals ability to adapt own expectations
  downwards but to maintain optimism for their
  children (again, topic for future research)

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Relevance to World Bank Work?

• The discrepancies that we find in respondents
  subjective assessments of well being and
  objective income based measures provide policy
  relevant information. Why are the FAs
  frustrated, for example, if they have upward
  mobility?
• Discrepancies can help explain why rational
  policies which seem to work can be rejected by
  taxpayers and consumers (because of hyperbolic
  discounting, risk aversion, horizontal
  inequalities, perceived inequalities, etc.
  Russian unemployment findings, for example)
• Does happiness vary across regions? Surprisingly
  little in its main determinants but some minor
  differences show important differences among the
  regions unemployment rates and fear of reform in
  Russia optimism among the poor in Africa
  relatively lower happiness rates in general in
  Eastern Europe even in places where incomes have
  increased (status changes vs income gains, etc).
• Some findings merely an insight into human
  psychology and adaptation to changing
  circumstances some provide some hints about how
  to make economic reforms more politically
  palatable

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Applications to Policy - Caveats

• Key to success of happiness measures as a survey
  instrument is lack of definition of happiness
  it is left up to the respondent
• At the same time, how we define happiness will
  matter a great deal to its relevance to policy,
  and that entails normative judgements
• Happiness as contentment relevance to policy?
  Happiness as defined by Kenny and Kenny as
  contentment, welfare, and dignity (smacks of Sen)
  seems a more appropriate policy tool
• Cardinality vs ordinality do we care more about
  making someone who is unhappy happy than making a
  happy person happier? Surveys do not attach
  cardinal weights, but should policy?
• Happy peasant problem rich person with high
  expectations who is miserable versus poor peasant
  with no information that is very happy
• Policies that can make people happy in the short
  term, like inflationary spending, may be very bad
  for their longterm welfare (unemployment in
  Russia, for example). At same time, particularly
  do to risk aversion and hyperbolic discounting,
  most reform policies will cause unhappiness in
  the short term. Can that be a gauge to policy?
• National well being indicators as a way to track
  and compare happiness across countries and time
  complements to GNP?