explain why the concept of utility is an imperfect proxy for happiness
300 words maximum
do not add citations for external sources or add a bibliography
Rationality,
and
in
Economics
Youssef Benzarti
Disclosure: Slides rely on David Laibson’s (Harvard) and Frank Schilbach’s
(MIT) lecture notes.
The economic agent according to Econ 10A
In our class, we assume that economic agents have two
main ingredients:
Preferences, which correspond to their utility function
A budget constraint, which corresponds to the resources
(money) they have access to
The agent maximizes her utility subject to the budget
constraint
In this lecture we will think about the real life counterpart of
utility maximization
In particular, we will think about what utility represents and
how it relates to happiness…
… and also look into whether people actually try to
maximize their happiness
Do people act in their best interest?
Economists assume there exists a strong relationship
between a person’s choices (behavior) and the happiness
such choices trigger (true well-being).
Economists believe that most of the time people act
(approximately) in their best interest by making choices
that will make them happier and avoiding ones that will
make them unhappy.
However, we all make choices that make us unhappy: eg,
eating too much at an all you can eat restaurant, not
studying hard enough for an exam, etc.
How can we check whether this assumption is
appropriate?
It would be great if we could measure behavior and the
happiness such behavior brings (well-being).
Do people act in their best interest?
Economists assume there exists a strong relationship
between a person’s choices (behavior) and the happiness
such choices trigger (true well-being).
Economists believe that most of the time people act
(approximately) in their best interest by making choices
that will make them happier and avoiding ones that will
make them unhappy.
However, we all make choices that make us unhappy: eg,
eating too much at an all you can eat restaurant, not
studying hard enough for an exam, etc.
How can we check whether this assumption is
appropriate?
It would be great if we could measure behavior and the
happiness such behavior brings (well-being).
Do people act in their best interest?
Economists assume there exists a strong relationship
between a person’s choices (behavior) and the happiness
such choices trigger (true well-being).
Economists believe that most of the time people act
(approximately) in their best interest by making choices
that will make them happier and avoiding ones that will
make them unhappy.
However, we all make choices that make us unhappy: eg,
eating too much at an all you can eat restaurant, not
studying hard enough for an exam, etc.
How can we check whether this assumption is
appropriate?
It would be great if we could measure behavior and the
happiness such behavior brings (well-being).
Do people act in their best interest?
Economists assume there exists a strong relationship
between a person’s choices (behavior) and the happiness
such choices trigger (true well-being).
Economists believe that most of the time people act
(approximately) in their best interest by making choices
that will make them happier and avoiding ones that will
make them unhappy.
However, we all make choices that make us unhappy: eg,
eating too much at an all you can eat restaurant, not
studying hard enough for an exam, etc.
How can we check whether this assumption is
appropriate?
It would be great if we could measure behavior and the
happiness such behavior brings (well-being).
Decision utility
Economists use the word “utility” (or “utility function”) to
describe the preferences that make sense of observ
ed
choices.
Daniel Kahneman has worked extensively on the concept
of utility (he received a Nobel Prize for this and other work).
He calls these revealed preferences “decision utility.”
Preferences that make sense of decisions
For example, for an addict the decision utility of drug
consumption exceeds the decision utility of quitting.
Decision utility
Economists use the word “utility” (or “utility function”) to
describe the preferences that make sense of observed
choices.
Daniel Kahneman has worked extensively on the concept
of utility (he received a Nobel Prize for this and other work).
He calls these revealed preferences “decision utility.”
Preferences that make sense of decisions
For example, for an addict the decision utility of drug
consumption exceeds the decision utility of quitting.
Decision utility
Economists use the word “utility” (or “utility function”) to
describe the preferences that make sense of observed
choices.
Daniel Kahneman has worked extensively on the concept
of utility (he received a Nobel Prize for this and other work).
He calls these revealed preferences “decision utility.”
Preferences that make sense of decisions
For example, for an addict the decision utility of drug
consumption exceeds the decision utility of quitting.
Experienced utility
Kahneman also measures the hedonic consequences of
choices.
He calls these hedonic experiences, “experienced utility.”
Preferences that coincide with “doing”
This is how Jeremy Bentham (1748-1832) conceived of
utility (pleasure and pain)
How can we measure hedonic experiences (e.g.
wellbeing)?
How do people aggregate these experiences over time?
Experienced utility
Kahneman also measures the hedonic consequences of
choices.
He calls these hedonic experiences, “experienced utility.”
Preferences that coincide with “doing”
This is how Jeremy Bentham (1748-1832) conceived of
utility (pleasure and pain)
How can we measure hedonic experiences (e.g.
wellbeing)?
How do people aggregate these experiences over time?
Experienced utility
Kahneman also measures the hedonic consequences of
choices.
He calls these hedonic experiences, “experienced utility.”
Preferences that coincide with “doing”
This is how Jeremy Bentham (1748-1832) conceived of
utility (pleasure and pain)
How can we measure hedonic experiences (e.g.
wellbeing)?
How do people aggregate these experiences over time?
Experienced utility
Kahneman also measures the hedonic consequences of
choices.
He calls these hedonic experiences, “experienced utility.”
Preferences that coincide with “doing”
This is how Jeremy Bentham (1748-1832) conceived of
utility (pleasure and pain)
How can we measure hedonic experiences (e.g.
wellbeing)?
How do people aggregate these experiences over time?
Techniques for measuring experienced utility
Observer ratings
Real-time self-reports of mood, pain, pleasure, or
happiness (palm pilot)
Facial measures
Autonomic measures (autonomic nervous system,
including electrodermal, respiratory, and cardiovascular)
Vocal measures (pitch, loudness, tone, quality, timing)
Left brain asymmetry (electroencephalogram – EEG)
Responses to emotion-sensitive tasks
Example: “Would you like to talk with a good friend?” –
“No? – Then you are probably in a bad mood.”
Techniques for measuring experienced utility
Observer ratings
Real-time self-reports of mood, pain, pleasure, or
happiness (palm pilot)
Facial measures
Autonomic measures (autonomic nervous system,
including electrodermal, respiratory, and cardiovascular)
Vocal measures (pitch, loudness, tone, quality, timing)
Left brain asymmetry (electroencephalogram – EEG)
Responses to emotion-sensitive tasks
Example: “Would you like to talk with a good friend?” –
“No? – Then you are probably in a bad mood.”
Techniques for measuring experienced utility
Observer ratings
Real-time self-reports of mood, pain, pleasure, or
happiness (palm pilot)
Facial measures
Autonomic measures (autonomic nervous system,
including electrodermal, respiratory, and cardiovascular)
Vocal measures (pitch, loudness, tone, quality, timing)
Left brain asymmetry (electroencephalogram – EEG)
Responses to emotion-sensitive tasks
Example: “Would you like to talk with a good friend?” –
“No? – Then you are probably in a bad mood.”
Techniques for measuring experienced utility
Observer ratings
Real-time self-reports of mood, pain, pleasure, or
happiness (palm pilot)
Facial measures
Autonomic measures (autonomic nervous system,
including electrodermal, respiratory, and cardiovascular)
Vocal measures (pitch, loudness, tone, quality, timing)
Left brain asymmetry (electroencephalogram – EEG)
Responses to emotion-sensitive tasks
Example: “Would you like to talk with a good friend?” –
“No? – Then you are probably in a bad mood.”
Why might decision utility and experienced utility
differ?
A few examples
Inaccurate memories of past hedonic experiences
Poor forecasts of preference dynamics
Failures to anticipate adaptation (marriage, paraplegic
injuries, winning the lottery, denied promotion)
Emotional (visceral, impulsive) decision-making
Much of the issues are about disconnects between
decision utility and experienced utility.
Why might decision utility and experienced utility
differ?
A few examples
Inaccurate memories of past hedonic experiences
Poor forecasts of preference dynamics
Failures to anticipate adaptation (marriage, paraplegic
injuries, winning the lottery, denied promotion)
Emotional (visceral, impulsive) decision-making
Much of the issues are about disconnects between
decision utility and experienced utility.
Why might decision utility and experienced utility
differ?
A few examples
Inaccurate memories of past hedonic experiences
Poor forecasts of preference dynamics
Failures to anticipate adaptation (marriage, paraplegic
injuries, winning the lottery, denied promotion)
Emotional (visceral, impulsive) decision-making
Much of the issues are about disconnects between
decision utility and experienced utility.
Does marriage increase happiness?
treadmill, meaning that the effects of substantial life changes on subjective well-
being are temporary.
The economic counterpart of the hedonic treadmill is that large increases in
the standard of living have almost no detectable effects on life satisfaction or
happiness. Easterlin (1995), for example, finds that the average self-reported
happiness level did not increase in Japan between 1958 and 1987, although real
income increased fivefold. Figure 4 presents related results for China, based on a
sample of 15,000 individuals interviewed by the Gallup Organization. China expe-
rienced remarkably fast economic growth from 1994 to 2005, with real income per
capita increasing by a factor of 2.5. This growth had substantial consequences for
material well-being: ownership of color television sets rose from 40 percent
of households to 82 percent, and the fraction with a telephone jumped from
10 percent to 63 percent. Yet Figure 4 indicates no increase in reported life
satisfaction from 1994 to 2005; in fact, the percentage of people who say they are
dissatisfied has increased, and the percentage who say they are satisfied has de-
creased. Studies do find that income and life satisfaction are positively correlated in
a cross-section of individuals, but the correlation is only around 0.20 (for example,
Easterlin, 2001). One interpretation is that aspirations rise with income. Indeed,
there is survey evidence that the level of income that an individual considers to be
“sufficient” is primarily determined by his or her current income (van Praag and
Ferrer-i-Carbonell, 2004). Frey and Stutzer (2002) estimate that adaptation offsets
about two-thirds of the benefits of any increase in income.
Some changes in circumstances have more than transitory effects: for example,
the effects of unemployment and chronic pain do not seem to attenuate fully with
time (Lucas, Clark, Georgellis and Diener, 2004). Nevertheless, the frequent finding
Figure 3
Average Life Satisfaction for a Sample of German Women
(by year of marriage t � 0)
7
4 3
7.1
7.2
7.3
7.4
7.5
7.6
L
if
e
sa
ti
sf
ac
ti
o
n
7.7
7.8
0
Marriage (females)
1 �1 �2 �3 �4 2
Source: Clark, Diener, Georgellis and Lucas (2003), using data from the German Socioeconomic Panel.
Note: An asterisk indicates that life satisfaction is significantly different from the baseline level.
Developments in the Measurement of Subjective Well-Being 15
Remembered utility
Our memory of a hedonic experience remembered utility
exhibits duration neglect.
You remember the quality, not the length of the experience.
Remembered utility follows peak-end rule.
Retrospective
evaluations are predicted by an average of:
(i) peak affective response recorded during an episode, and
(ii) end value recorded just before the termination of an
episode.
Remembered utility
Our memory of a hedonic experience remembered utility
exhibits duration neglect.
You remember the quality, not the length of the experience.
Remembered utility follows peak-end rule. Retrospective
evaluations are predicted by an average of:
(i) peak affective response recorded during an episode, and
(ii) end value recorded just before the termination of an
episode.
Remembered utility
Our memory of a hedonic experience remembered utility
exhibits duration neglect.
You remember the quality, not the length of the experience.
Remembered utility follows peak-end rule.
Retrospective
evaluations are predicted by an average of:
(i) peak affective response recorded during an episode, and
(ii) end value recorded just before the termination of an
episode.
Remembered utility
Our memory of a hedonic experience remembered utility
exhibits duration neglect.
You remember the quality, not the length of the experience.
Remembered utility follows peak-end rule. Retrospective
evaluations are predicted by an average of:
(i) peak affective response recorded during an episode, and
(ii) end value recorded just before the termination of an
episode.
Evidence of duration neglect and peak-end
evaluations
Immersion of one hand in cold water: cold-pressor task
Colonoscopy
Plotless films of pleasant/unpleasant subjects, such as
low-level flying over an African landscape or of amputation
Aversive sounds of varying loudness and duration
Shocked rats
Evidence of duration neglect and peak-end
evaluations
Immersion of one hand in cold water: cold-pressor task
Colonoscopy
Plotless films of pleasant/unpleasant subjects, such as
low-level flying over an African landscape or of amputation
Aversive sounds of varying loudness and duration
Shocked rats
Cold Pressor (Schreiber & Kahneman)
Short trial: hand in 14 degree water (60 sec)
Long trial: hand in 14 degree water (60 sec), then temp
rises to 15 degrees (30 sec)
65% of subjects chose to repeat the long trial (decision
utility 6= experienced utility)
Result replicated with aversive noise
Cold Pressor (Schreiber & Kahneman)
Short trial: hand in 14 degree water (60 sec)
Long trial: hand in 14 degree water (60 sec), then temp
rises to 15 degrees (30 sec)
65% of subjects chose to repeat the long trial (decision
utility 6= experienced utility)
Result replicated with aversive noise
Cold Pressor (Schreiber & Kahneman)
Short trial: hand in 14 degree water (60 sec)
Long trial: hand in 14 degree water (60 sec), then temp
rises to 15 degrees (30 sec)
65% of subjects chose to repeat the long trial (decision
utility 6= experienced utility)
Result replicated with aversive noise
Cold Pressor (Schreiber & Kahneman)
Short trial: hand in 14 degree water (60 sec)
Long trial: hand in 14 degree water (60 sec), then temp
rises to 15 degrees (30 sec)
65% of subjects chose to repeat the long trial (decision
utility 6= experienced utility)
Result replicated with aversive noise
Colonoscopy (Katz, Redelmeier, & Kahneman)
Control group: regular colonoscopy
Treatment group: procedure lengthened by one minute
with colonoscope inside the body but stationary
The nature of experiment was not explained to the
subjects!
Extra minutes was uncomfortable, but not very painful.
Treatment group had significantly better memories of the
overall experience
Colonoscopy (Katz, Redelmeier, & Kahneman)
Control group: regular colonoscopy
Treatment group: procedure lengthened by one minute
with colonoscope inside the body but stationary
The nature of experiment was not explained to the
subjects!
Extra minutes was uncomfortable, but not very painful.
Treatment group had significantly better memories of the
overall experience
Colonoscopy (Katz, Redelmeier, & Kahneman)
Control group: regular colonoscopy
Treatment group: procedure lengthened by one minute
with colonoscope inside the body but stationary
The nature of experiment was not explained to the
subjects!
Extra minutes was uncomfortable, but not very painful.
Treatment group had significantly better memories of the
overall experience
Colonoscopy (Katz, Redelmeier, & Kahneman)
Control group: regular colonoscopy
Treatment group: procedure lengthened by one minute
with colonoscope inside the body but stationary
The nature of experiment was not explained to the
subjects!
Extra minutes was uncomfortable, but not very painful.
Treatment group had significantly better memories of the
overall experience
Measuring happiness with survey questions
One approach: simply ask people directly how happy they
are
Ladder question:
“How satisfied are you with your life as a whole these
days?”
Affect question:
“Did you experience [insert emotion here] yesterday?”
Some researchers argue such happiness measures should
form basis for judging well-being (and become policy
objective).
Lots of interesting graphs HERE.
https://ourworldindata.org/happiness-and-life-satisfaction/
Measuring happiness with survey questions
One approach: simply ask people directly how happy they
are
Ladder question:
“How satisfied are you with your life as a whole these
days?”
Affect question:
“Did you experience [insert emotion here] yesterday?”
Some researchers argue such happiness measures should
form basis for judging well-being (and become policy
objective).
Lots of interesting graphs HERE.
https://ourworldindata.org/happiness-and-life-satisfaction/
Measuring happiness with survey questions
One approach: simply ask people directly how happy they
are
Ladder question:
“How satisfied are you with your life as a whole these
days?”
Affect question:
“Did you experience [insert emotion here] yesterday?”
Some researchers argue such happiness measures should
form basis for judging well-being (and become policy
objective).
Lots of interesting graphs HERE.
https://ourworldindata.org/happiness-and-life-satisfaction/
Measuring happiness with survey questions
One approach: simply ask people directly how happy they
are
Ladder question:
“How satisfied are you with your life as a whole these
days?”
Affect question:
“Did you experience [insert emotion here] yesterday?”
Some researchers argue such happiness measures should
form basis for judging well-being (and become policy
objective).
Lots of interesting graphs HERE.
https://ourworldindata.org/happiness-and-life-satisfaction/
Life satisfaction around the globe
Life satisfaction and income: comparisons across
countries
Life satisfaction and income: comparisons within
countries
Life satisfaction and income: comparisons within
countries
We think that that others are less happy than say they
are.
Happiness and income: comparisons over time
Figure: Average happiness and real GDP per capita for repeated
cross-sections of US citizens; Source: Andrew Oswald
Life satisfaction and income: comparisons over time
of adaptation challenges both everyday intuition and economic doctrine, by sug-
gesting that in the long-run well-being is not closely related to one’s circumstances
and opportunities. A possible resolution, which draws on the distinction between
affect and judgment as separate elements of well-being, is that the hedonic tread-
mill could instead be an aspiration treadmill. If people gradually adjust their aspira-
tions to the utility that they normally experience, an improvement of life circum-
stances would eventually lead them to report no higher life satisfaction than they did
before, even if they were experiencing higher utility than previously. In this scenario,
experienced utility could rise even while one’s global evaluation of life satisfaction
remained constant.
An empirical test of this hypothesis requires separate measurements of expe-
rienced utility and global life satisfaction. Although empirical tests of this sort are
only in their infancy, initial findings yield little support for the aspiration treadmill.
The Kahneman, Krueger, Schkade, Schwarz and Stone (2004) study of women
in Texas also collected data on satisfaction, both with life in general and with one’s
work. It therefore affords an opportunity to compare the correlates of experienced
affect with the correlates of the judgmental component of satisfaction. Measures of
net affect from the Day Reconstruction Method were positively correlated with
measures of general life satisfaction— but the correlations were often only moder-
Figure 4
Life Satisfaction in China as Average Real Income Rises by 250 Percent
Overall, how satisfied or dissatisfied are you with the way things are going in your life today?
Would you say you are very satisfied, somewhat satisfied, somewhat dissatisfied, or very
dissatisfied?
0%
19
95
19
94
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
10%
20%
30%
40%
P
er
ce
n
ta
ge
s
at
is
fi
ed
o
r
d
is
sa
ti
sfi
ed
50%
60%
70%
80%
90%
Dissatisfied
Satisfied
100%
Source: Derived from Richard Burkholder, “Chinese Far Wealthier Than a Decade Ago— but Are
They Happier?” The Gallup Organization, �http://sww.gallup.com/poll/content/login.aspx?ci�14548�.
Notes: In 1997, 1999 and 2005, respondents were given four response categories: very dissatisfied;
somewhat dissatisfied; somewhat satisfied; and very satisfied. In 1994, respondents were given a fifth
response category: “neither satisfied nor dissatisfied.” The chart reports the percentage who were
satisfied or dissatisfied. Thirty-eight percent of respondents chose the neutral category in 1994; those
respondents were allocated in proportion to the number who responded that they were satisfied or
dissatisfied in that year.
16 Journal of Economic Perspectives
Who reports higher levels of happiness?
Females
People with large social networks
Young adults everywhere
Older adults (in rich countries)
Married and cohabiting people
Highly educated people
Healthy people (including mental health)
People with high income
Who reports higher levels of happiness?
Females
People with large social networks
Young adults everywhere
Older adults (in rich countries)
Married and cohabiting people
Highly educated people
Healthy people (including mental health)
People with high income
Who reports lower levels of happiness?
Recently divorced/separated people
People who are unemployed
Citizens of countries with high blood pressure (Portugal)
People who were under 18 when their parent died
People whose parents quarreled frequently (unless the
parents divorced)
Who reports lower levels of happiness?
Recently divorced/separated people
People who are unemployed
Citizens of countries with high blood pressure (Portugal)
People who were under 18 when their parent died
People whose parents quarreled frequently (unless the
parents divorced)
Life satisfaction and life events
Measuring happiness is problematic.
In general, correlation and causality are hard to pin down.
Strack, Martin, and Schwarz (1988): correlation between
“general happiness” and “happiness with dating”
If general happiness question is asked first: 0.16
If general happiness question is asked second: 0.55
Measuring happiness is problematic.
In general, correlation and causality are hard to pin down.
Strack, Martin, and Schwarz (1988): correlation between
“general happiness” and “happiness with dating”
If general happiness question is asked first: 0.16
If general happiness question is asked second: 0.55
Measuring happiness is problematic.
In general, correlation and causality are hard to pin down.
Strack, Martin, and Schwarz (1988): correlation between
“general happiness” and “happiness with dating”
If general happiness question is asked first: 0.16
If general happiness question is asked second: 0.55
Measuring happiness is problematic.
In general, correlation and causality are hard to pin down.
Strack, Martin, and Schwarz (1988): correlation between
“general happiness” and “happiness with dating”
If general happiness question is asked first: 0.16
If general happiness question is asked second: 0.55
Measuring happiness is problematic.
In general, correlation and causality are hard to pin down.
Strack, Martin, and Schwarz (1988): correlation between
“general happiness” and “happiness with dating”
If general happiness question is asked first: 0.16
If general happiness question is asked second: 0.55
A summary
Improving material circumstances increase reported
happiness
Cross-sectional evidence relating reported happiness to
income.
But in the long-run several effects tend to partially offset
rising reported happiness:
Adaptation to one’s own improving material conditions
Social comparisons to other people’s improving material
conditions
Even permanent changes in material circumstances may
not change long-run reported happiness if everyone else
gains (US time series?).
However, if a permanent change in material circumstances
causes gain relative to comparison groups, will probably
enjoy a higher long-run level of reported happiness
(cross-sectional evidence).
A summary
Improving material circumstances increase reported
happiness
Cross-sectional evidence relating reported happiness to
income.
But in the long-run several effects tend to partially offset
rising reported happiness:
Adaptation to one’s own improving material conditions
Social comparisons to other people’s improving material
conditions
Even permanent changes in material circumstances may
not change long-run reported happiness if everyone else
gains (US time series?).
However, if a permanent change in material circumstances
causes gain relative to comparison groups, will probably
enjoy a higher long-run level of reported happiness
(cross-sectional evidence).
A summary
Improving material circumstances increase reported
happiness
Cross-sectional evidence relating reported happiness to
income.
But in the long-run several effects tend to partially offset
rising reported happiness:
Adaptation to one’s own improving material conditions
Social comparisons to other people’s improving material
conditions
Even permanent changes in material circumstances may
not change long-run reported happiness if everyone else
gains (US time series?).
However, if a permanent change in material circumstances
causes gain relative to comparison groups, will probably
enjoy a higher long-run level of reported happiness
(cross-sectional evidence).
A summary
Improving material circumstances increase reported
happiness
Cross-sectional evidence relating reported happiness to
income.
But in the long-run several effects tend to partially offset
rising reported happiness:
Adaptation to one’s own improving material conditions
Social comparisons to other people’s improving material
conditions
Even permanent changes in material circumstances may
not change long-run reported happiness if everyone else
gains (US time series?).
However, if a permanent change in material circumstances
causes gain relative to comparison groups, will probably
enjoy a higher long-run level of reported happiness
(cross-sectional evidence).
Experiment more!
We tend do the same things over and over again.
Why don’t we experiment more?
Immediate costs, long-term benefits
Default effects/inertia
Other reasons?
Go out and try new things! Read more HERE.
Experiment more!
We tend do the same things over and over again.
Why don’t we experiment more?
Immediate costs, long-term benefits
Default effects/inertia
Other reasons?
Go out and try new things! Read more HERE.
- Utility
Happiness