Explaining Happiness

What do social survey data tell us about the determinants of happiness? First, that the psychologists' setpoint model is questionable. Life events in the nonpecuniary domain, such as marriage, divorce, and serious disability, have a lasting effect on happiness, and do not simply deflect the average person temporarily agove 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 problematic. An increase in income, and thus in the goods at one's dispoal, does not bring with it a lasting increase in happiness because of the negative effect on utility of hedonic adaptation and social comparison.A better theory of happiness builds on the evidence that adaptation and social comparison affect utility less in the nonpecuniary than pecuniary domains. Because individuals fail to anticipate the extent to which adaptation and social comparison undermine expected utility in the pecuniary domain, they allocate an excessive amount of time to pecuniary goals, and shortchange nonpecuniary ends such as family life and health, reducing their happiness. There is need to devise policies that will yield better-informed individual preferences, and thereby increase individual and societal well-being.