Paradox: Easterlin Happiness is related to relative income, not absolute income. Not much
change in well-being as nations become wealthier
Easterlin found that within a given country people with higher incomes are more likely to
report being happy. However, in international comparisons the average reported level of
happiness does not vary much with national income per person, at least for countries with
income sufficient to meet basic
the theory that relative levels of money have much more influence on our psychological
wellbeing than absolute levels. The theory was proposed after Easterlin noticed that
peoples happiness, while higher for affluent people within countries, was not higher
between countries. That is, a person earning $100,000 per year in America would report
being happier than his $40,000 compatriot, but would be no happier than a Hungarian
earning $40,000 per year. It is in our ability to compare ourselves that our sense of
wellbeing lies, not in how much money we actually have. Easterlin equally proposed a
non-linear trajectory on a happiness vs money scale. Past a certain point of basic need
provision (shelter, food, security), he suggested that continued economic growth does
not substantially influence our expression of happiness. As Carol Graham, a senior
fellow at the Brookings Institution in Washington, said: happiness seems to rise with
income up to a point, but not beyond it.
Easterlins paradox became the theoretical base underlying an alternative economic
paradigm where governments role was to promote stability rather than growth. This
way, people would not be so exposed to job loss with its concomitant negative
consequences, while theoretically the slower growth would not have a significant
dampening effect on peoples happiness.
Not everyone agrees with Easterlin.
Justin Wolfers and Betsey Stevenson, challenged the validity of the paradox, stating that
their findings indicate a clear role for absolute income and a more limited role for relative
income comparisons in determining happiness. We are left with the question: does the
Easterlin paradox bear up under scrutiny, or not?
This post is not designed to answer that question. I think that Easterlins ideas resonate
with a lot of people who are disillusioned with the current state of economic affluence.
However, in weighing up the arguments and counter-arguments, I think its important to note
several points
Firstly, as a philosopher friend of mines elegant thesis concluded, happiness and welfare
are vexingly difficult to measure. Self-report is fraught with cultural, sexual, social obstacles
that distort responses. This contributes to ongoing debate about the accuracy of the data.
Moreover, happiness is influenced by relativity (how happy we were yesterday affects our
mood today) and habituation (a heightened mood induced by a positive event slowly loses
its luster, and generally returns to a persons base level of happiness).
Secondly, relativity itself is relative. The argument that Wolfers and Stevenson bring is that
the effects of absolute income are a powerful predictor of happiness. That is to say, a
person earning $200,000 per year in America will be happier than someone earning
$100,000 in Hungary, even if they exist on relatively similar socio-economic levels within
their countries. However, I wonder whether the growth of the mass-media and the Internet
have negated any sense of proximal versus distal relativity. Our Hungarian can measure
himself just as easily against our American as against his fellow countrymen, because of
the spread of information and programming across the planet. This globalization creates an
environment that highlights rather than downplays relative income disparities.
Thirdly, affluence is a pretty good deal. Economic growth can pay for investments in
scientific research that lead to longer, healthier lives. It can allow trips to see relatives not
seen in years or places never visited. When youre richer, you can decide to work less
and spend more time with your friends. It is churlish not to recognize the benefits of the
wests current economic strength.
Stevenson and Wolfers believe there is a robust relationship between well-being and income
(or more precisely the log of income).
Midwesterners' miscalculation may stem from the fact that they are focusing on one positive aspect of
Californians' lives, such as the climate, while failing to consider the potential negatives, such as the cost of living,
the number of available job opportunities and personal safety.
The reason our assumptions are often inaccurate is simple, says Hsee. "We're not really built to be happy, we're
built to survive," he says. "It is only in recent human history that survival is no longer a primary concern and the
pursuit of happiness becomes more important."
Small gains
It's a clich that money cannot buy happiness, and psychologist David Schkade, PhD, a University of Texas,
Austin, business professor, suggests the saying is false: Money does factor into people's well-being, it just
doesn't matter as much as how people use their free time.
For instance, in a 2006 Science (Vol. 312, No. 5,782, pages 1908-1910) study, Schkade found that people who
made more than $90,000 a year were nearly twice as likely to report being "very happy" than people who earned
less than $20,000. But there was hardly any difference between people earning $50,000 and $89,999.
"Money makes a difference in getting you safe, warm and fed," he says. "But then once those things are taken
care of, it comes down to how you are spending your time: Are you doing the things you would like to be doing?"
The finding suggests that people who are always anxious to get their next raise fail to experience a significant
long-term happiness boost because once they earn the raise, they're already seeking their next one. Only when
people use their newfound income to spend more time on leisure do they experience a well-being gain.
But for the most part, Schkade found that as people's incomes rise, they do not spend much more time relaxing.
In fact, people with incomes between $20,000 and $99,999 reported spending 8.1 percent of their time in
leisurely pursuits, which is only slightly less than the 10.2 percent for people with incomes more than $100,000.
Yet those higher income earners also reported spending more time taking part in work-related compulsory
activities and devoting more of their time to working or commuting.
More money, more responsibility
The finding also offers an explanation as to why a higher income does not provide the boost to people's
happiness that others frequently assume: Outside observers focus on how their wealthy neighbors can afford to
play golf and take expensive vacations, and they fail to account for the increased time big earners must spend
commuting and working.
These blinders are an example of what researchers call a "focusing illusion," where observers make judgments
based on wrongly weighted information. And in areas besides raises, this illusion may be the culprit for why we
are so bad at predicting what makes us happy, says Schkade.
For instance, when buying a home, people too often focus on curb appeal, or how attractive the house looks
from the street, while failing to think about how the house fits their daily needs, he says. For instance, a larger
house in the suburbs may make buyers forget about the long commute--and pass up a more modest house in
the city, he says.
"Think about what you would be doing with that commute time," says Schkade. "Since commuting is the bottom
of the barrel and spending time with your favorite people is enjoyable, that's probably not a good trade."
To remove the blinders, Schkade suggests people systematically reconstruct their daily activities and
experiences, and how they felt about them, before making major life decisions.
In a 2004 Science (Vol. 306, No. 5702, pages 1776-1780) article, Schkade and his colleagues asked people to
answer general satisfaction questions. They then compiled a short diary of their previous day by thinking about
their day as a "continuous series of scenes or episodes of a film." The researchers told participants to write down
the times at which each episode began and ended, as well as where they were, who they interacted with and
how they felt.
The researchers found that by evoking the context of their previous day, people reduced such errors as the
focusing illusion. Moreover, they found that such general circumstances as income and education had little
impact on happiness during a regular day.
Another reason people can't predict what makes them happy is their inherent impulsivity, says Hsee.
In a 2006 Trends in Cognitive Science (Vol. 10, No. 1, pages 31-37) article, Hsee found that although people aim
to act rationally, that desire, paradoxically, can lead people to make irrational decisions.
For instance, let's say a man has two concert tickets: One cost $100, the other was free. If he read a few reviews
that suggest that the free concert will be more enjoyable than the one he paid for, he'd probably go to the free
concert. But if he doesn't want to squander the money he paid for the ticket, he'll go to the other concert. Most
often, people choose to attend the concert they paid for, says Hsee.
"People often don't spend time to figure out their potential enjoyment," he says. Rather, they seek immediate
gratification. Yet as they seek to avoid discomfort and maximize their short-term happiness, they are actually
lessening their long-term happiness. But that's not surprising, says Hsee.
"From an evolution point of view, our goal is only to survive now," he says.
-Happiness is related to relative income, not absolute income. Not much change in well-being as nations become
wealthier
-argument= wealthy has very little to do life satisfaction, what matters to different countries is relative to the
standard of living
-people could few happiness in different terms
3. After a certain point (75,000) you dont gain much in pos affect, net blue,
Argument= Not that money makes you happier, but not having makes you unhappier-> after that (after a certain
point).. Money has very little to do with overall satisfaction
Affective Forecasting Errors and Happiness
Focusing Illusion people overestimate the extent to which the target event matters
Duration neglect and the failure to predict adaptation
Projection bias people making predictions about themselves in another state (i.e., sexually
aroused) have difficulty imagining how they will feel in the other state
Prospect Theory
KahnemanandTversky(1979).Theypresentacritiqueofexpectedutility
theoryasadescriptivemodelofdecisionmakingunderriskanddevelopan
alternativemodel,whichtheycallprospecttheory.KahnemanandTversky
foundempiricallythatpeopleunderweightoutcomesthataremerelyprobable
incomparisonwithoutcomesthatareobtainedwithcertainty;alsothatpeople
generallydiscardcomponentsthataresharedbyallprospectsunder
consideration.Underprospecttheory,valueisassignedtogainsandlosses
ratherthantofinalassets;alsoprobabilitiesarereplacedbydecisionweights.
Thevaluefunctionisdefinedondeviationsfromareferencepointandis
losses(riskseeking)andisgenerallysteeperforlossesthanforgains(loss
normallyconcaveforgains(implyingriskaversion),commonlyconvexfor
aversion)(A hypothetical value function).Decisionweightsaregenerallylower
thanthecorrespondingprobabilities,exceptintherangeoflowprobabilities
(Weighting functions for gains (w+) and losses (w-) based on median estimates of
parameters).
Value:thehypothesisthatthevaluefunctionisconcaveforgainsand
convexforlosses.Theproposedvaluefunctionis(i)definedondeviations
fromthereferencepoint;(ii)generallyconcaveforgainsandcommonly
convexforlosses;(iii)steeperforlossesthanforgains.
Whilecalculatingthevaluefunctionandassigningweights,wemustnot
ignorethefactthatspecialcircumstancesmaydistortpreferences.For
example,theutilityfunctionofanindividualwhoneeds$30,000tobuyacar
mayrevealanexceptionallysteeprisenearthecriticalvalue(inthiscase,
$30,000).Inasimilarway,apersonsaversiontolossesmayincreasesharply
nearthelossthatwouldcompelhimtosellhishouseormovetoaless
desirableneighborhood.Suchcircumstancesmayreadilyproducelocalized
concaveregionsinthevaluefunctionforgainsandconcaveregionsinthe
valuefunctionforlosses.
WhileProspectTheory,likeexpectedutilitytheory,attemptstopredict
preferences,therearemanyunknownsinitsmathematicalmodels.Itseemsto
havetheadvantageoverutilitytheoryinitsabilitytoexplainsupposedly
irrationalbehavior,andyetmaintainitsabilitytobemathematicallymodeled.
Whileitcannotbeasubstituteforconventionalutilitytheory,itcertainlyisan
alternativeworthasecondlook.
http://en.wikipedia.org/wiki/Prospect_theory
utilitygovernment
http://www.highbeam.com/doc/1G1-83453326.html
Governments,ofcourse,donotrelyexclusivelyonordinary,inexperienceddecisionmakers;
theyrely,toagreatextent,onexperts.Consequently,determiningtherelativestrengthsand
weaknessesoflayandexpertdecisionmakingisfundamentaltodesigningprocessesthat
minimizethedamagecognitivelimitationswillwreakonasociety'sabilitytogovernitself
wisely.Indeed,thechoicebetweenexpertandlaydecisionmakingmaybethemostcrucial
designdecisiontobemadeinagovernmentengagedinextensivesocialandeconomic
regulation.
Expertsclearlyhaveadvantagesoverlaypersonsindecisionmaking.Byvirtueoftheir
trainingandexperience,theyobviouslyhavemoreknowledge.Byitself,however,knowledge
isnotenough;infact,extrainformationfeedscertainprevalentcognitiveillusions.(45)For
example,inonestudy,expertanalystsestimatedthatthelikelihoodof"adramaticincrease
inoilpricesanda30%dropintheconsumptionofoilintheUnitedStates"wasgreaterthan
thelikelihoodof"a30%dropintheconsumptionofoilintheUnitedStates."(46)The
greaterdetailintheformereventmadeitseemmorelikely(anexampleofthephenomenon
thatpsychologistscallthe"representativenessheuristic").(47)
Ifexpertsrelyonheuristicsthatleadthemastray,theextraknowledgetheybringtoa
problemmaybecomeuseless,evencounterproductive.Thus,atleastasimportantas
knowledgeisanawarenessofjudgmentalpitfallsthatarecommontothetypesofproblems
expertsencounter.Onlyifexpertsalsodevelopdecisionmakingcompetencetocomplement
theirknowledgecantheyreliablymakebetterdecisionsthanlaypersons.
Expertshavetwoopportunitiesfordevelopingsuchdecisionmakingcompetencethatare
typicallyunavailabletolaydecisionmakers:experienceandtraining.Byrepeatedlymaking
thesametypesofdecisions,expertsencounterthesameproblemsandoften(althoughnot
always)obtainusefulfeedbackontheirmistakes.Experienceaccompaniedbyfeedback
allowsexpertstoidentifysituationsinwhichtheyareusinginappropriateheuristicsorare
trappedbymisleadingschema.Thus,expertscandevelopdifferentwaysofthinkingabout
frequentlyencounteredproblemswhenpreviouswaysofthinkingarenotproducing
desirableresults.
Furthermore,experiencewithdecisionmaking,evenwithoutgoodfeedback,canbehelpful.
Psychologistshavenotedthatwhenpeopleperceiveaproblemasuniqueaoneofakind
judgmentcalltheytendtorelyonintuitionandmentalshortcutsthatleadthemastray.(48)
Forexample,psychologistshavefoundthatpeopleoftenexpressanoverconfidenceintheir
abilitytoanswertriviaquestions;whenpeoplesaythattheyare95%confidentintheir
answertoaquestion,theyaregenerallyrightabout85%ofthetime.(49)Atthesametime,
however,peoplehaveafairlyaccuratesenseofhowmanyquestionstheycananswer
correctlyinasetofquestions.(50)Determiningone'sconfidenceinabilitytoansweratrivia
questionasanisolatedinstanceincreasesvulnerabilitytocognitiveerror,whereasseeingit
aspartofasetleadstoanaccurateassessment.Seeingaproblemasoneofatypeof
problemsgenerallyleadstolessrelianceonmisleadingthoughtprocessesandmoreaccurate
decisionmaking.
Experiencethusfacilitateswhatpsychologistscall"steppingoutside"ofadecisionmaking
problemtoassessdecisionmakingstrategies.(51)Experienceddecisionmakershavehad
moreofanopportunitytoevaluatehowtheymakedecisions.Withfeedback,theycan
determinewhenthementalstrategiesuponwhichtheyrelyproducepositiveresults.Even
withoutfeedback,experienceddecisionmakersacquiretheabilitytoseecommonalities
acrossproblemsandtorecognizenewrelationshipsbetweenthecharacteristicsofaproblem
andasensiblechoice.
Furthermore,expertshavetraininginhowtomakedecisions.Overtime,professionstendto
developadaptationstocognitivelimitationsthatimpairprofessionaljudgment.(52)For
example,anumberofcognitivebiasesmakeitdifficultforcivilengineerstoidentify
preciselythenecessarydegreeofstructuralsupportforabuilding.(53)Nevertheless,very
fewbuildingscollapseasaresultoflackofstructuralsupport.Thereasonisthatnormsof
goodcivilengineeringpracticecallforbuildinginmuchmorestructuralsupportthan
appearsnecessary,asasafetyprecaution.(54)Withoutevenidentifyingcognitivelimitations
astheproblem,civilengineershavemanagedtodevelopanadaptationthatkeepsthose
limitationsfromproducingdisastrousconsequences.
Evenwiththeseadvantagesoverlaydecisionmakers,however,expertscanstillfallpreyto
illusionsofjudgment.Thepsychologicalliteratureisrepletewithcasestudiesoferroneous
orfoolishexpertjudgments.(55)Feedbackthatexpertsreceivemaybebiased,orsubjectto
biasedinterpretation,therebymakingitdifficultforindividualsandtheirprofessionstolearn
frompastmistakes.(56)
Moresignificantly,expertiseintroducesitsownbiases.Notably,expertstendtobe
overconfidentabouttheirdecisions.Expertsare"oftenwrongbutrarelyindoubt."(57)
Peopleingeneraltendtooverestimatetheirownabilitiesinareasaboutwhichtheybelieve
themselvestohavesomegreaterthanaverageknowledge.Thistendencyismore
pronouncedinexperts,whoalsotendtohavegreatfaiththattheirprofessionhasidentified
mostoftheproblemstheyarelikelytofaceandequippedthemwiththeabilitytosurmount
theseproblems.Moreover,expertsmaymyopicallyfocusonissueswithintheirareaof
expertiseandtherebyfailtorecognizethatadecisionwouldbenefitfromaccessingother
bodiesofknowledgeorwaysofthinking.(58)Expertiseproducesausefulsetofschemato
guidedecisionmaking,butlikeallschema,theylimitadecisionmaker'sabilitytothink
differentlyaboutaproblemandtorecognizethelimitationsinherentintheschema.Inshort,
thementalshortcutsthatexpertsuseproducemoreaccurateresultsthanthoseuponwhich
laypersonsrely,butexpertsarelesslikelytoquestionwhethertheyhavemadeagood
decision.
Thus,althoughexpertsoftenhaveknowledge,experience,andtrainingthatprotectthem
fromsomeseriouserrorsthatplaguethelaydecisionmaker,theyarestillpredictablyfallible.
Expertsinmanysituationsdonotreceivereliablefeedback,whichinhibitstheiropportunity
tolearnfromexperience.Additionally,theytendtobeoverconfidentintheirjudgments,
placingtoomuchfaithintheirabilities.Therefore,expertisecanhavesimilarconsequences
toheuristicsinlaypersons:clearlyuseful,butdangerousifoverused.
C.TheRoleofInstitutionalDesigninAvoidingDecisionmakingTraps
Whendecisionsaremadeinanorganizationalsettingthetypicalpracticeinmodern
regulatorygovernmentinstitutionaldesigncancountertheeffectofcognitivelimitations.
Ofparticularinteresttoregulatorypolicymaking,organizationscanbestructuredto
optimizethebenefitsandcostsofexpertdecisionmaking.
Onesuchstructuralchoiceinvolvesputtingexpertswithcertainkindsofknowledgeand
experienceinchargeofsomeaspectsofthedecision,anddifferentkindsofexpertsincharge
ofotheraspects.Forexample,banksseparatethepeoplewhomakedecisionsonprimary
loansfromthosewhoworkwithloansindefault.(59)Thefirstgrouptendstodevelopsocial
connectionsandcognitiveattachmentstotheborrowerthatcancloudjudgmentabout
whetherandwhentoforeclose.Indeed,psychologistshaveidentifiedastrongtendencyin
businesspeopletothrowgoodmoneyafterbad("escalatingcommitment").(60)By
transferringthemanagementofaloanfromtheinitiallendertoaworkoutspecialist,banks
avoidtheerrorintroducedbyescalatingcommitmentandobtainafreshperspectiveonthe
questionswhether,andhowlong,togivetheborrowerachancetoworkthroughadifficult
period.
Furthermore,agroupofexpertscanbesubjectedtoasetofgroundrulesfordecisionmaking
thatreducetheeffectsofcognitiveerrors.Forexample,aftersufferingtheconsequencesof
poordecisionmakingbyhisnationalsecurityteamintheBayofPigsincident,President
Kennedyredefinedhowhisteamwouldoperate.IntheBayofPigsinvasion,Kennedy's
advisorshadquicklycoalescedaroundaninitialstrategytowardsCuba,withoutconsidering
alternatives.(61)Oncetheyconvincedthemselvesthatthisstrategywassound,theybecame
overconfidentaboutitssuccess,makingwildassumptionsabouthowtheplanwould
operate.WhentheCubanMissileCrisisarose,Kennedyarrangeddifferentproceduralrules.
Hedividedhisdecisionmakersintodifferentgroupsofexpertsandappointedhisbrotherasa
"devil'sadvocate."Thisarrangementforcedhisadvisorscontinuallytocritiqueanddefend
theirassumptionsandtoconsidercreativealternativeresponsestothecrisis.
Ex. A.ThePublicChoiceModelofGovernmentalPolicyFailure
Asothershavenoted,(62)publicchoiceisnotaneatlyunitarytheory.Commontoall
analyseslabeled"publicchoice"isthecoreconcept,takenfromeconomicthought,of
instrumentalrationality:Theindividualwillorderhisbehaviorsoastomaximizethe
likelihoodofachievinghisindividuallydefinedgoals.(63)Somepublicchoicetheorists
makenofurthermotivationalassumptions.Suchaccounts,usefullydubbed"thin
rational[ity]"modelsbyJohnFerejohn,(64)refusetospecifythekindsofgoalsthe
individualpursues.ForthesetheoristsexemplifiedbytheworkofSymposiumparticipant
DavidSpence(65)theanalysiscanproceedwithoutregardtowhetherindividualsare
motivatedbyselfinterest,selflessness,orsomeshiftingcombinationofthetwo.Wedonot
considerhereeitherthetheoreticaldefensibilityorprescriptiveutilityofsuchaccounts.(66)
Althoughthinrationalityaccountsflourishin(andperhapsdominate)thecontemporary
publicchoiceanalysesofpoliticalscientistsandeconomists,(67)theyhavebeenthe
exceptionratherthanthenorminlegalscholarship.
Here,wefocusonwhathasbeentheparadigmaticpublicchoicetheoryoflegalanalyses.
Thisaccountaddstotheassumptionofinstrumentalrationalitythefurtherassumptionthat
thegoalofhumanactorsisadvancingindividualmaterialselfinterest.Apparentlyforthe
pointisrarelydiscussedexplicitlythereisarangeofviewsaboutwhetherthismotivational
assumptionofuniversalselfinterestisaheuristicratherthananassertionoffact.(68)For
presentpurposes,itmakesnodifferencewhetherthepublicchoiceaccountrestsonthe
descriptiveconclusionthatselfinterestreallyistheexclusivehumanmotivation,oronthe
prescriptivejudgmentthatanalysisofgovernmentinstitutionsshouldproceedasifthiswere
so.