5+6. Subjective Well-being and Utility

Question 1

Happiness Theory and Preference Theory

Answer 1

utility and well-being in terms of:
1. happines
2. actual preferences

Question 2

Revealed pref. ≠ true pref.

Answer 2

True pref. require:
1. full information
2. make no mistakes
3. perfect self-control

Question 3

History of utility in Economics

Answer 3

1. hedonic pleasure/pain
2. marginal utility (neuroclassival rev.)
3. psychology and economics (20th century)
4. behavioural economics, happiness economics (1970s)

Question 4

Cardinal and Ordinal Utility

Answer 4

cardinal:
- objective, quantifiable measure
- allows interpersonal comparison
- not neccessary to derive demand functions

ordinal:

• in terms of relative value
• pref. and utility revealed in choices
• cannot calculate difference between each pref.

Question 5

Considerations when measuring SWB

Answer 5

Consider:
1. time frame
2. nature of quality of experience (hedonic/affective, evaluative/cognitive, eudainomic)

Question 6

Hedonic and affective difference

Answer 6

Hedonic: pleasure, satisfaction, enjoyment. intrinsic pleasure of the experience

Affective: emotional response, feelings elicited by a choice. Joy, pride, surprise, anger, or regret

Question 7

Limitations with measurements

Answer 7

1. Different interpretation (different culture, language)
2. Bounded scale (only 0-5)
3. Sensitive to context, mood when answering
4. Social desirability bias (not be truthful)
5. Peak-end-bias

Question 8

why is SWB still valuable?

Answer 8

1. validity (physical evidence: heart-rate, brain activity, sleep etc.)
2. reliability (study over time)
3. common patterns (dataset/ time period)

Question 9

Measurement by report

Answer 9

• face to face
• telephone survey

Question 10

Benjamin et al. 2012 paper

Answer 10

Do people choose what they think would maximise their SWB?

13 ypothetical scenarios (trade-off)
–> choice and SWB align 80% of the cases
–> 12% choose higher income but less sleep, even if lower anticipated SWB
–> OLS found other variables matter as well (family, status, social life)

Implication:
- not all max. SWB and happiness
- policy-maker should be cautious

Supports Harsany’s view that WB includes objective goods

Question 11

Harsanyi, 1997

Answer 11

AUTONOMOUS DESIRES:
- welfare beyong mere pleasure/+ive feelings
- deeper non-hedonomic motivations

e.g. parents help their children purely for the pleasure of doing so. FALSE

INTINCTIVE (hunger/curiousity)
ALTUISTIC (support/ life accomplishment)

–> pleasures are determined by desires, not the other way round

Question 12

Common patterns

Answer 12

• U-shaped age vs WB
• health (+ive)
• friends and fam (+ive)

Question 13

What is the Easterlin Paradox?

(Clark, Frijters and Shields, 2008)

Answer 13

Short-term (cross sectional) increases in individual income raise happiness, but long-term (panel) aggregate income growth does not significantly enhace societal happiness

Why?
- Adaptations
- Relative income
- Expectation

Question 14

Satiation?

Answer 14

satiation: a critical level of income beyond which additional income does not improve well-being

No major well-being dataset supports the claim that well-being stops increasing at higher income levels.

Question 15

Subject well-being and income

Answer 15

income: proxy for economic consumption
* above certain level, most effects on SWB appear to be due to RELATIVE income instead of absolute income

1. adaptation over time (social norms / expectations)
2. Social comparison

Question 16

Deaton and Kahneman, 2010 part 1

Required reading

Answer 16

Different measures of SWB [graph]
Data: US 2008/09, 450 000 sample size
1. positive affect
2. “Not blue”: worrying/sad
3. Stress free”
4. Ladder: avg reported number scale 0-10

Emotional WB vs life sat.
* emotional: diminishing return with income
* life sat.: consistent increase with income, at a decreasing rate

high income improves life evaluation but not emotional wb

Question 17

Deaton and Kahneman, 2010 part 2

Deaton and Kahneman, 2010

Answer 17

headache + low income: 31.6% more reported sadness (compared to no headache)
headache + high income: 19.5% more reported sadness (compared to no headache)

poverty makes adverse circumstanced WORSE by increasing the emotional bu

Question 18

Deaton and Kahneman, 2010 part 3

Deaton and Kahneman, 2010

Answer 18

normalising income to see how other factors influence.
–> income and education closely related to life evaluation
–> but health, loneliness, and smoking are stronger predictors of daily emotions

explanation:
- adaptation
- ability to enjoy small things

Question 19

Adaptation

Answer 19

initial increase in happiness after a income shock, but slowly declines and is dissipated

Question 20

SWB depends on what you spend it on

Answer 20

• spending money on others
• charity
• experiential purchases (create memories)

Question 21

What reference are they comparing to?

Answer 21

Comparison with similar others:
* self-improving upwards comparison
* self-enhancing downwards comparison

AUTOMATIC COMPARISON:
depends on ppl around, jobs, environment exposure
–> if fail to tkae into account –> systematic mistake

Question 22

Literature: imposes a single aggregative comparison reference

EXAM!!!!!

Answer 22

Single comparison reference: compare their income to one average figure.

• Ideal approach: Use a weighted average over reference group (closer to you (physically, socially, or emotionally) might have more influence on your feelings about your own income)
• Current practice: Use simple group means (age/gender/region) as the benchmark.

Problem: Failing to control for local cost of living may bias the analysis.

Question 23

Luttmer, 2005

PUMA

Answer 23

Neighbour’s earnings:
✅ Increase satisfaction with one’s city or town, suggesting that local cost of living is not the main driver of reduced well-being
❌ Reduce overall subjective well-being, leisure time, satisfaction with leisure, satisfaction with friendships

Subsitute intrinsic sources of satisfaction (time for family, friends, and hobbies) to Extrinsic goals (like income, possessions, and status)

Projection bias

Question 24

Frank, Robert (1997)

Answer 24

Puzzle: why don’t we spend money on things that will make us happier?
1. Positional externalities
e.g. a bigger house make you feel good only if bigger than neighbour’s
–> benefit is relative, not absolute

2. incomplete information about adaptation and make systematic mistake

Question 25

Positional Externalities

Answer 25

when an individual's consumption or achievement affects others’ well-being only because of **social comparison**, not because of any direct gain or loss in resources.

Question 26

Are positional concerns just envy?

Answer 26

Not necessarily 1. Subjective perception (how social comparisons affect personal satisfaction), 1. Position-dependent allocation and social functioning (how relative position affects access to resources and opportunities), 1. Information and motivation (how comparisons can positively drive ambition and improvement). objective and functional roles, such as influencing incentives and signalling ## Footnote Roles (i) and (ii) → produce negative positional externalities (your gain = someone else's loss). Role (iii) → can produce positive effects via learning or inspiration.

Question 27

Bursztyn, Leonardo et al. (2018)

Answer 27

- large bank in Indonesia, upper middle class sample 1. test demand for **pure status component**. demand for plat. card 21% > control (13.7%) with identical benefits. Followed up with a 25% discount on plat. card, take up only increased by 3.7%pt, indicating price does not affect demand. more likely to be used in social context for social image (restaurants) 2. test for **positional ext.**. offer diamond card, identical to plat. tt group: told criterion for plat. card reduced (less valuable/exclusive, weakened sig. power). double demand for diamond card (21% to 44%). --> perceived exlusivity matters 3. tt group compleed a **self-affirmation** task. large reduction in demand for plat. cards. but sample size was small (question reliability of result). SELF-IMAGE AND SOCIAL IMAGE MAY BE SUBSTITUES

Question 28

Utility Depends on Relative Position | Clark and Oswald 1998

Answer 28

Conformity: If others consuming more or working longer hours, you may feel pressure to match them to preserve your relative status. --> individuals make similar choices — leading to herding or conformity in consumption, work effort, lifestyle. Deviance: try to stand out or signal uniqueness If the social comparison harms their utility, they may choose alternative lifestyles or opt out of competitive environments

Question 29

Expenditure Cascade

Answer 29

When high-income individuals increase spending on luxury goods or lifestyle… 👉 Lower-income groups feel **pressure** to keep up (due to social comparison). They increase their own spending, even if they **cannot afford** it. Leads to a cascade effect: *rising consumption norms across all income levels.* Often funded by **debt** or **reduced savings** in lower-income groups. Causes **financial stress**, inequality, and sometimes reduced well-being. Data: PREDICT: median earner’s consumption *should* have grown by only ~15% between 1979 and 2005. top 1% earner expected to tripple spending. REALITY: median size of new houses rose from 1,600 sq ft (1980) to 2,100 sq ft (2001). This is more than double the predicted increase in consumption for the median earner.

Question 30

Happiness and comparison intensity | Calrk and Senik, 2010

Answer 30

The more you consider income comaprisons, the less the swb consistent negative effect with alternative wb measures

Question 31

Reference is endogenous

Answer 31

Reference points evolve with individual actions and social context. If individuals do not account for the feedback between their **actions** and **shifting** reference points, → They may make **systematic mistakes** in judgment or decision-making. (e.g. buying more now thinking it will increase satisfaction — but it just raises future expectations)