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IZA
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Building a Better Theory of Well-Being
by
Richard A. Easterlin
(March 2003)
published in: Luigino Bruni and Pierluigi Porta (eds.), Economics and Happiness: Framing the Analysis, Oxford University Press, 2006
Abstract:
What do social surveys of life cycle experience tell us about the determinants of subjective
well-being? First, that the psychologists’ setpoint model is wrong. Life events in the
nonpecuniary domain, such as marriage, divorce, and physical disability, have a lasting effect
on well-being, and do not simply deflect the average person temporarily above or below a
setpoint given by genetics and personality. Second, mainstream economists’ inference that in
the pecuniary domain “more is better,” based on revealed preference theory, is wrong. An
increase in income, and thus in the goods at one’s disposal, does not bring with it a lasting
increase in well-being, because of the negative effect on utility of hedonic adaptation and
social comparison. The utility anticipated ex ante from an increase in consumption turns out
ex post to be less than expected, as one adapts to the new level of living, and as the living
levels of others improve correspondingly.
A better theory of well-being builds on the evidence that adaptation and social comparison
affect utility more in pecuniary than nonpecuniary domains. The failure of individuals to
anticipate that these influences disproportionately undermine utility in the pecuniary domain
leads to an excessive allocation of time to pecuniary goals at the expense of nonpecuniary
goals, such as family life and health, and reduces well-being. There is need to devise policies
that will yield better-informed individual preferences, and thereby increase individual and
societal subjective well-being.
Text: See Discussion Paper No. 742
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