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Econ434handout7

Econ434handout7 - THE FINANCIAL PAGE BOOM AND GLQOM few...

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Unformatted text preview: THE FINANCIAL PAGE BOOM AND GLQOM few years ago, the Nobel Prize— wirmingptgazhologist Daruel Kahne— man conducted an odd experiment. He hadagrtmpofstudentseatahoudof their favorite ice cream while listening to aparfictflarpiece ofmusiceightdays in a row. After the first day, Kahneman asked them to predict how they’d feel about the whole experience once it was over. Their predictions turned out to he wayoti" base. Some sealantswho drought that they’d hate having to eat the same flavor eight day's in a row became ad- dicted to it. Some who thought they’d enjoyflle experiencewere eventuallyre— pulsed by it The upshot: people may kncavwhen they’re happy; but they often don’t luiow what will make them happy. That poses a problem for the basic tenets of modern economics: thatpeople act in their own self-interest most of the tires, and that they usually know what that self—interest is. Well—being is actu— ally the central idea of economics,” the Princeton economist Alan Krueger said lastweekflButwe’veneverreallyfliod to measure it. We‘ve said, If we’re richer, andwe have more optionawe mustbe better ofil But we haven’t tried to find out if it’s really true.” Now that is changing. In the past few years, a loose collection of econo- mists and psychologists have started to talte seriously the question of happi- ness and its relation to the economy as a whole. Inspired by experiments like Kahncman’s, they have decided that it you want to understand the real impact of things like booms and busts you can’t just look at what people do. You haw to try to understand—using psycholog- ical experiments, long-term national sur- veys, and macroeconomic soldier-how they feel. Krueger and Kahneman, a Prinoeton colleague, are trying to come up with an accurate assay of measuring economic wellwbeing-ha sort of GDP. of mood. In the meantime, economists are using the flamed measures of happi- ness that we’re currently stuck with to tellussomevelyinterestingthingS, such as why the eoonomic senfiment seems so bleak, even though the American econ‘ TE THE NEW WEEK, REVENGE Ill coo: omy is four trillion dollars bigger and vastly more productive than it was a de- cade ago. There was, for example, the pleasant superiment devised by an MIT. psy— chologist named Dan Ariely. Ariely had each of forty volunteers put “a selected finger” in avise. EaCh volunteer endured a mains of trials, in which the pressure araskeptconstantforthcwholetrial, in"- creased, or decreased. (There was no ice cream.) After each trial, the volunteers, having removed their fingers floor the vise, were asked to rate the pain. {in av- erage, they said—not surprisingly—mat it hurt a lot. Whatwas notable, however, was that when the volunteers had been aibjected to decreasing pressure they re- ported less pain than when the pressure nos maintained or increased, even tlmugh hriely had made sure to apply the same amosmt of total fiarce in each trial. The vise experiment was a perfect il- lustration of something that Kahnemsn calls the Pealo’End rule. Men people assess a past experience, they pay atten— tion abovealltousothingsthowitfi-ltat the peak and whether it got better or worse at the end. A mild improve- ment—even if it’s an improvement fiom “intolerable” to ”pretty had”—makes the whole experience seem better, and a had ending makes everything seem worse. That might help explain why Americans feel so gloomy. Even after the stock-market crash and the reces- sion of 2001, the country is still a lot richer than it would have been had we muddled through the past decade. But the severity of the bust has overshada owedaIlthe realbenefits thatwe reaped fi‘om the boom. We might actually flee] better now if we had endured years of mediocre but steady grtmth instead of a precipitous rise and fail. The fact that we’re earning more maynothe enough to cancel outthe cf- foCts of an insecure labor market and a maniodepressive stock market. Though one can say, with reasonable confidence, that rich people tend to be happier than poor people, there’s surprisingly little ev- idenoe that heco rning richer acmally in- creases people’s happiness. The first im- portant study of national well-being, by the economist Richard Easterlin, found that once a country achieves a certain level of ”wealth getting richer makes no difference. And a famous 19% study of lottery winners found that a year after hitting thejacltpot theywerebarely happier than a control group of mgu— iar shlubs. Why? 01]: summon is that people are on what’s sometimes called a “hedo- nic treadmill," meaning that as they get wealfliiertheyquieldyadapttothcirnew circumstances. fit first, you love your Lenora, butbefom longitmayaswell be your old Pinto. But ifyuulose the LEI-Ills you don’t easily get over it. “Loss makes you more unhappy than gain makes you happy? Krueger says. Certainly that’s true of American businemes. They are, generally speaking, still profitable, but they cant help but sulk after the crum- bling of their boom-time dreams. The big question facing the U.S. economy right now may be one that the happiness—studies people are only start- ing to think about: Can unhappiness hurt an economy? Studies have shouru that self-described happy people earn more and are more productive. (Of course, we don’t leiow if success makes them happy; or vice versa.) rind, clearlg economic malaise can food on itself: glum investors turn miserly, consumers get tight, and businessmen balk at risk. Hardasitmathtobt-lievefihefiiturc of the U.S. economy looks bright, in the longtcrnLButto gettherewemightjust need to look on the sunny side. flames Snratuisrii ...
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