Building a Better Theory of Well-Being
AbstractWhat 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 InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 742.
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
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Find related papers by JEL classification:
- D60 - Microeconomics - - Welfare Economics - - - General
- I10 - Health, Education, and Welfare - - Health - - - General
- I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
- J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure
- Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Social and Economic Stratification
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-04-09 (All new papers)
- NEP-CBE-2003-04-09 (Cognitive & Behavioural Economics)
- NEP-LAM-2003-04-09 (Central & South America)
- NEP-LTV-2003-04-09 (Unemployment, Inequality & Poverty)
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