Subjective Well-being and Utility

Question 1

Stiglitz et al. (2010)

Answer 1

Well-being is multi-dimensional, a full account should consider:
1. material living standards e.g. income, consumption
2. health, education and personal activities
3. social connections and relationships
4. political voice, political stability
etc.

Question 2

The reporting function of SWB

Answer 2

R=r(h(y,z,c))+e

r= reporting function
h= underlying happiness function 
y= income 
z= socio-economic conditions 
c= contextual factors

Question 3

Validity of SWB?

Answer 3

answers to SWB questions have been correlated with

• physical evidence of affect such as smiling, laughing
• heart rate
• self-reported health
• independent evaluations by friends, relatives and strangers
• objective measures such as unemployment, income, etc

Oswald and Wu (2010) - life-satisfaction correlated with state-level QOL rank.

Question 4

Benjamin et al. (2012)

Answer 4

Do people choose what they think would maximise their SWB?

Overall, about 80% convergence between choice, and SWB-measured utility, suggesting that SWB is the main predictor of happiness.
however, other factors also important e.g. sense of purpose, control over own life, etc.

Question 5

Stone et al. (2010)

Answer 5

Happiness is U-shaped in age, reaches a minimum ar around 40 years old.

Question 6

Easterlin Paradox (1974)

Answer 6

Despite decades of economic growth and increases in GDP, we do not see an increase in reported levels of happiness => over time no relationship in developed countries between GDP and life satisfaction.

Why?
Because GDP measures absolute increases in income, whereas it could be that relative, and not absolute income is what matters.
As growth advances, everyone’s income increases, but relative income / conditional on social norms, also confirmed by Layard et al. (2018).

Question 7

Deaton and Kahneman (2010)

Answer 7

Distinction between emotional well-being and life evaluation. while the two are correlated, emotional well-being is more instantaneous, about momentary reactions, whereas life evaluation is over a course of one’s lifetime.
Income and education are more correlated with life satisfaction/evaluation than emotional well-being.

Emotional well-being increases with income, until $75K, beyond which an increase in income does not buy more happiness.

Why?
- reduced ability to enjoy the smaller things in life, e.g. spend quality time with family, no longer improves ability to enjoy leisure.

Question 8

Luttmer (2005, 2011)

Answer 8

Neighbours as Negatives

Relative income effect - also consistent with prospect theory’s relevance to reference points - neighbours as your reference point – the further away your income is from your neighbours, the worse your SWB/life evaluation is.
Also: Policy implications - projection bias, as people underestimate the extent to which their current state will be reflected in the future in terms of choosing where to live- under appreciate the effects of a change in comparison groups, think that buying a small house in a wealthy neighbourhood. it has been suggested that neighbourhoods greatly affect children’s life prospects, yet people sometimes choose to live in neighbourhoods that have adverse impacts, because of this underestimation.

the more socialisation, the more negative the effect of neighbour’s earnings.

Question 9

Frank (1997)

Answer 9

Do people’s increase in consumption increase their happiness?
Essentially, beyond a certain level, it does not.

Why?

1. there is incomplete information about the extent to which we know we will adapt to different goods
2. even if we were fully informed - people consider payoffs in isolation - instead of over total, collective benefits (in line with Kahneman and Tversky 1979)

Question 10

Clark et al (2008)

Answer 10

Positional Externalities.
Role of social comparison:

1. Subjective Perception - direct impact on quality of experience (relative value decreasing in the social reference and positive for downward comparison) - like Neighbours as Negatives - Luttmer (2005, 2011).
2. Position-dependent allocation: reward via performance in contests where the outcome is fully positional, means positional externalities = for your outcome to be better, other’s outcome should be worse
3. Information and motivation - if in situation of uncertainty - positive externality, to do better in the future.

Question 11

Comparison-Concave Utility

Answer 11

see diagram
Produces the following behaviour:
1. reference (a) increases
2. position relative to reference worsens a-a falls
3. marginal value of status increases , even though overall utility falls
4. optimal response is to increase action, a increases.