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Building a Better Theory of Well-Being

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  • Easterlin, Richard A.

    ()
    (University of Southern California)

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    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.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 742.

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    Length: 60 pages
    Date of creation: Mar 2003
    Date of revision:
    Publication status: published in: Luigino Bruni and Pierluigi Porta (eds.), Economics and Happiness: Framing the Analysis, Oxford University Press, 2006
    Handle: RePEc:iza:izadps:dp742

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    Related research

    Keywords: health; living level; subjective well-being; marital status; aspirations;

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    References

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    1. David G. Blanchflower & Andrew J. Oswald, 2000. "Well-Being Over Time in Britain and the USA," NBER Working Papers 7487, National Bureau of Economic Research, Inc.
    2. Winkelmann, Liliana & Winkelmann, Rainer, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 65(257), pages 1-15, February.
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    4. Hollander, Heinz, 2001. "On the validity of utility statements: standard theory versus Duesenberry's," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 227-249, July.
    5. Richard Easterlin, 2001. "Life Cycle Welfare: Trends and Differences," Journal of Happiness Studies, Springer, vol. 2(1), pages 1-12, March.
    6. Bernard M.S. van Praag & Paul Frijters, 1999. "The measurement of welfare and well-being; the Leyden approach," School of Economics and Finance Discussion Papers and Working Papers Series 071a, School of Economics and Finance, Queensland University of Technology.
    7. Kilpatrick, Robert W, 1973. "The Income Elasticity of the Poverty Line," The Review of Economics and Statistics, MIT Press, vol. 55(3), pages 327-32, August.
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    10. Bruno S. Frey & Alois Stutzer, 2002. "What Can Economists Learn from Happiness Research?," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 402-435, June.
    11. Richard Easterlin, 2002. "Is Reported Happiness Five Years Ago Comparable to Present Happiness? A Cautionary Note," Journal of Happiness Studies, Springer, vol. 3(2), pages 193-198, June.
    12. Easterlin, Richard A, 2001. "Income and Happiness: Towards an Unified Theory," Economic Journal, Royal Economic Society, vol. 111(473), pages 465-84, July.
    13. Layard, Richard, 1980. "Human Satisfactions and Public Policy," Economic Journal, Royal Economic Society, vol. 90(363), pages 737-50, December.
    14. Stadt, H. van de & Geer, S.A. van de & Kapteyn, A.J., 1985. "The relativity of utility: Evidence from panel data," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364325, Tilburg University.
    15. Frank, Robert H, 1997. "The Frame of Reference as a Public Good," Economic Journal, Royal Economic Society, vol. 107(445), pages 1832-47, November.
    16. Ng, Yew-Kwang, 1978. "Economic Growth and Social Welfare: The Need for a Complete Study of Happiness," Kyklos, Wiley Blackwell, vol. 31(4), pages 575-87.
    17. Clark, Andrew E & Oswald, Andrew J, 1994. "Unhappiness and Unemployment," Economic Journal, Royal Economic Society, vol. 104(424), pages 648-59, May.
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    Cited by:
    1. Peiro, Amado, 2006. "Happiness, satisfaction and socio-economic conditions: Some international evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 35(2), pages 348-365, April.
    2. Vendrik, Maarten C.M., 2013. "Adaptation, anticipation and social interaction in happiness: An integrated error-correction approach," Journal of Public Economics, Elsevier, vol. 105(C), pages 131-149.
    3. Gruen, Carola & Klasen, Stephan, 2012. "Has transition improved well-being?," Economic Systems, Elsevier, vol. 36(1), pages 11-30.
    4. Di Tella, Rafael & Haisken-De New, John & MacCulloch, Robert, 2010. "Happiness adaptation to income and to status in an individual panel," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 834-852, December.
    5. Golden, Lonnie & Wiens-Tuers, Barbara, 2006. "To your happiness? Extra hours of labor supply and worker well-being," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 35(2), pages 382-397, April.

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