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EC345: W6-W10 notes
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Leture, seminar and reading notes for weeks 6-10 of behavioural economics
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Subjective well-being and happinessUtility in Economics
● Jeremy Bentham: utility as hedonic pleasure/pain (directly measurable)
● Neoclassical revolution: abstraction of value via marginal utility
○ Maximising “bang for your buck”
○ Gossen, Stanley Jevons, Walras, Menger
● 20th century micro theory separated psychology and economics
○ Preference as minimal required structure
○ Representative utility only as ordinal (not cardinal) object
○ No assumptions about preferences
■ Utility of individual i is a function of consumption of individual i
○ Preferences defined as-if revealed in observed choice behaviour
○ Rejection of hedonistic assumptions of Benthamite Utility
● 1970s onwards: behavioural economics, happiness economics (Easterlin,
Kahneman, Oswald, Layars)
Cardinal and ordinal utility
● Cardinalism → utility is objective and quantifiable
○ Allows interpersonal comparison
○ Necessary for social welfare functions/public choice
○ Not necessary to service demand functions
○ Good for economics beyond behaviour → quality of outcome
● Ordinalism → utility is in terms of relative value (represents preferences)
○ Sufficient to derive demand/explore the interaction of demand+supply
○ Useful for economic theory
○ Omits the strength of preferences/experiences
Bentham: experienced utility
● Well being as experienced utility
○ Nature of value: hedonic/affective, evaluative/cognitive, eudaimonic
■ Hedonic/affective: emotional well-being
■ Evaluative/cognitive: well-being as life evaluation
■ Eudaimonic: rank yourself on a scale
● Temporal issue: immediate (instant utility), global (total utility)
○ Global → possibility of systematic errors in recollection
○ Possibility of systematic errors in forecasting
Multi-dimensional well-being (Stiglitz et al, 2010)
● Full account of well-being should consider these dimensions simultaneously:
○ Material living standards (income, consumption, wealth)
, ○ Health, education, personal activities (+ work)
○ Social connections/relationships
○ Environment (present and future)
○ Political voice and governance
○ Insecurity (economic and physical)
Subjective well-being: measurement by report
● Objective (conditions, capabilities) and subjective (experience) dimensions of
well-being are important
● Simple, direct measure of subjective well-being: by report
○ Responses to a survey-style question
○ Different techniques for obtaining the report
■ Face-to-face, postal or telephone survey
■ Momentary evaluation (experience sampling, ecological
momentary assessment)
■ Day reconstruction method: subjects keep a diary and break the
day into episodes. Report activities and feelings in that episode
■ U-index measures how much time people spend doing
unpleasant activities
● Different questions approach different concepts
○ Time frame → immediate, global, local
○ Nature of the quality of experience → hedonic, evaluative,
eudaimonic
Distribution of British life-satisfaction levels
● Most report themselves as being pretty happy
● May be underreporting of those who are less happy
The reporting function
● Subjective well-being data is censored reports of an assumed underlying,
unobservable experience utility construct
○ Censored: can only take certain values → no curvature
● r =r (h ,( y , z ,c ))+ e
○ r ( .) → reporting function
○ h( .) → underlying happiness function
○ y → socioeconomic determinants
○ z → demographic and personal characteristics
○ c → other relevant contextual factors
○ e → individual specific error term to communicating happiness
Modelling ordinal categorical dependent variables
● Reported subjective well-being as a discrete dependent variable. Options:
○ Binary discrete choice model → LPM, logit, probit
, ○ Ordinal outcome discrete choice model → ordered logit/probit
○ OLS as an indicative approximation, especially if it is a sizeable scale
■ Check the results are consistent with discrete choice methods
Subjective well-being measurement issues
● Interpersonal comparability
○ Interpretation of the question varies (translation issues if cross-country)
○ Scale may be used differently
● Bounded scale
● Observed sensitivity to context, mood, ordering effects, priming
● Possible deliberate or subconscious distorted report due to social context
○ Social desirability bias
○ May be affected by if measurement is face-to-face/by phone etc
● Global reports: errors in recollection and aggregation
○ Focusing illusion: salient measures (income) may be overweighted
○ Peak-end bias: value of remembered utility is overweighted by the
peak and end value
■ Remembered utility: utility a person thinks an event gave them
● Inevitably some error but plausible averages are found over large samples
○ Errors are not a huge issue unless they are systematic
Why are subjective well-being measures valuable?
● Validity: correlated with other well-being measures
○ Physical evidence of affection (smiling/laughing/electrical brain activity)
○ Independent evaluations
○ Self-reported health and sleep quality
○ Recent positive changes in circumstances
● Reliability over time: moderate 2-week correlation
● State-level subjective well-being effect is correlated with state-level quality of
life (calculated with non-subjective data)
● Common patterns over a wide range of datasets: U-shape with age
Subjective well-being and objective well-being
● Oswald and Wu (2010) compare life satisfaction data with state-level imputed
quality-of-life ranking
○ Life satisfaction data: 1.3 million random Americans from the BRFSS
(2005-08)
● Gabriel et al (2003) calculate the state-level quality of life calculated using
non-subjective data
○ Rank states from 1-50
○ Use many factors → weather, state park visitor numbers,
commute time, crime etc
● State quality of life ranking + life satisfaction data have a strong positive
correlation
, Subjective well-being as a measure of Choice utility
Benjamin et al (2012)
Questions
● Does (neoclassical) Choice Utility and SWB-measured utility coincide?
● Do people choose what they think would maximise their SWB?
Method
● 13 hypothetical scenarios with 2 alternatives, exploring trade-offs of factors
important in well-being (income, housing, sleep, commute, time with friends)
● Samples from 3 populations:
○ Students
○ Patients in a doctor’s waiting room
○ Nationally representative sample interviewed by phone
● Respondents are asked which alternative they would choose, and under
which they anticipate greater SWB
○ No possibility for indifference (may exaggerate the difference)
● Test whether rankings coincide
Example
● Trade-off between sleep and income
● Scenario 1: Jobs that are almost the same, but with different hours + wages
● Option 1: $80,000 a year. Reasonable hours → 7.5 hours of sleep per
night
● Option 2: $140,000 a year. Unusual hours → 6 hours of sleep per night
Findings
● Choice and anticipated well-being was consistent 83% of the time
○ 20% of choices had a discrepancy between choice + anticipated well-
being
● When controlling for own happiness, other factors are significant on choice
and subjective well-being → family happiness and social life
○ Own happiness: most important factor, explains the majority of choice
● ‘Life satisfaction‘ is a better predictor of choice than ‘Happiness measures’
● Predicted SWB coincide least with choices when students are asked
questions that are related to important decisions in their life
○ Respondents are more likely to pick higher income or ‘more money’
alternatives even if they think it has a lower predicted SWB
Conclusions
● People do not seek to maximise SWB exclusively (at least as measured here)
○ SWB is a uniquely important argument in the utility function
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